Widdrington (Estate of) c. Wightman  
2011 QCCS 1788  
SUPERIOR COURT  
CANADA  
PROVINCE OF QUEBEC  
DISTRICT OF MONTREAL  
No:  
500-05-001686-946  
DATE: April 14, 2011  
______________________________________________________________________  
IN THE PRESENCE OF: THE HONOURABLE MARIE ST-PIERRE  
_____________________________________________________________________  
_
The Estate of the late Peter N. Widdrington  
Plaintiff  
v.  
Elliott C. Wightman and AL.  
Defendants  
______________________________________________________________________  
JUDGMENT  
_
_____________________________________________________________________  
[
1] Time has come to put an end to the longest running judicial saga in the legal history  
of Quebec and Canada.  
[
2] Time has come to decide the plaintiff’s claim, one of many claims made before our  
Court by lenders and investors in Castor Holding Limited (“CHL” or “Castor”) further to  
Castor’s bankruptcy in 1992 and, in so doing, to communicate answers to various  
common issues that will be binding in all of these other files.  
JS1012  
500-05-001686-946  
PAGE: 2  
Th e Case in a n u t sh ell  
[
3] The core issue of this case concerns professional responsibilities and whether the  
defendants, chartered accountants and partners of the accounting firm Coopers &  
Lybrand (“C&L” or “Coopers”), were negligent in the performance of their work and the  
issuance of their opinions for Castor and whether they should be held liable to indemnify  
Peter Widdrington’s estate (“Widdrington”) for its alleged loss of $2.7 million further to  
Castor’s collapse and bankruptcy.  
•
Are under review, the work done for the 1988, 1989 and 1990 audits and the  
work performed in preparation of valuation letters of Castor’s shares.  
•
Are under review the following opinions issued by Coopers: the 1988, 1989 and  
1
990 auditors’ reports on the consolidated financial statements of Castor, the  
various valuation letters issued during that period and until November 1991 and  
the various certificates issued to support legal for life opinions signed by  
McCarthy Tétrault.  
[
4] Given the claims made in other files and the binding effect of the present judgment  
on all common issues, more than $1billion in claims is at stake for Coopers in case of  
an adverse decision on the negligence issue.  
[
5] The four fundamental questions - the first three being common issues and the fourth  
1
a specific issue to the Widdrington file - are :  
1
. Were the audited consolidated financial statements of Castor for 1988, 1989 and  
990 materially misstated and misleading?  
1
2
. Did C&L commit a fault in the professional work that they performed in  
connection with the subject audits of Castor, the valuation opinions that they  
issued and the legal for life certificates?  
3
. Taking into account that Castor is incorporated under the New Brunswick  
Corporation Act, that Coopers performed its work in various worldwide locations  
under the responsibility of a Montreal engagement partner and always issued the  
consolidated financial statements and other opinions out of its Montreal offices,  
that Widdrington resided in Ontario while various other claimants live in different  
European countries, what is the governing law applicable: New Brunswick or  
Ontario common law, Quebec civil law or another law?  
1
The parties have submitted numerous questions that the Court should consider in her deliberations -  
there are 176 questions on the final list of questions : see the Minutes of trial, conference call of May  
19, 2010, annex G  
500-05-001686-946  
PAGE: 3  
4
. Did Widdrington suffer damages and, if he did, is there a causal connection  
between a fault of C&L and those damages that render Coopers liable for same?  
[
6] Castor raised, borrowed and loaned money for real estate properties located in  
Canada and the United States until it collapsed and went bankrupt in 1992.  
[
7] Castor operated as an unregulated financial intermediary, a private company: Castor  
presented itself as a spread lender, placing deposits and loans from private and  
institutional investors and banks, many of which were Europeans, into high yield  
mortgage and equity loans.  
[
8] Castor operated internationally out of its head office in Montreal. It had various  
2 3 4  
subsidiaries , namely in Curacao (Netherlands Antilles) , Zug (Switzerland) , Rotterdam  
5 6 7  
the Netherlands) , Cyprus and Dublin (Ireland) .  
(
[
9] The accounting for the Canadian operations and the corporate consolidation was  
performed in Montreal at Castor’s offices. The accounting records for a number of the  
subsidiaries were maintained in Zug (Switzerland) and Schaan (Lichtenstein) by  
companies called Aurea Treuhand and Global Management.  
8
[
10] Coopers & Lybrand were CHL’s auditors from the company’s inception and  
Elliott Wightman (“Wightman”) was, at all times, the engagement partner in charge of  
the Castor file.  
[
11] Under the responsibility of Wightman, two teams were involved to audit CHL and  
some of its subsidiaries: the Montreal team, who worked out of Castor’s head office in  
Montreal and the overseas team, who performed its work in Zug and Schaan.  
[
12] Consolidation work, final wrap-up meetings with Wolfgang Stolzenberg  
“Stolzenberg”), the mastermind behind Castor, and issuance of the consolidated  
audited financial statements always took place in Montreal.  
(
[
13] Other professional services in litigation rendered by C&L to Castor like the  
issuance of share valuation letters and the issuance of certificates in support of Legal  
for Life Opinions were also rendered out of the C&L Montreal office.  
2
PW-16-3 and PW-2893-2  
3
CHIF – see PW-2400-18, PW-2400-20 and PW-2400-42 (bates 016638 and 016639)  
4
CFAG – see PW-2400-18, PW-2400-20 and PW-2400-42 (bates 016638 and 016639)  
5
CHINBV – see PW-2400-29 (bates 016301), PW-2400-34 (bates 016396)  
6
CHIO – see PW-2400-75 (bates 017084), PW-2400-98 (bates 017713 and 017714), PW-2400-101  
(
bates 017783) and PW-2400-102 (bates 017817)  
7
8
CHII – see PW-2400-75 (bates 017084), PW-2400-98 (bates 017713 and 017714), PW-2400-101 (bates  
17783) and PW-2400-102 (bates 017817)  
PW-2400-14 (bates 016044), PW-2400-17 (bates 016112 and 016113), and PW-2400-20 (bates  
16157)  
0
0
500-05-001686-946  
PAGE: 4  
[
14] Widdrington invested in Castor in October 1988, December 1989 and October  
1
991. He became a member of its Board of directors on March 21, 1990.  
[
15] Widdrington claims that he relied upon the Consolidated Financial Statements of  
Castor audited by Coopers, the Auditors' Reports and the Valuation Letters also  
prepared by Coopers, as well as the Legal for Life Opinions, to invest in and to loan  
substantial sums of money to Castor and moreover, to approve as a Board director, the  
declaration and payment of a dividend for which he was sued further to Castor’s  
bankruptcy.  
[
16] Widdrington claims that he would simply not have made investments in Castor  
absent the unqualified opinions of Coopers, one of the world’s largest and most  
prestigious accounting firms.  
[
17] Widdrington alleges that such reliance was reasonable and that Coopers should  
be held liable for all damages he sustained further to his investments and to his decision  
on dividend.  
[18] Other lenders and investors make similar allegations.  
Plaintiff’s position  
[
19] Plaintiff submits that:  
•
Overwhelming evidence shows that C&L failed to perform their professional  
services in accordance with the standards of the day and that such failures were  
blatant, pervasive and inexcusable faults.  
•
Castor’s loans and revenue were overstated by hundreds of millions of dollars  
and the audited financial statements bore no relationship to the reality of Castor’s  
true financial position.  
•
•
Quebec civil law applies - where C&L negligent acts and faults took place.  
Widdrington’s reliance on Defendants’ professional opinion was unquestionably  
reasonable in the circumstances.  
•
•
Widdrington suffered damages as a result of Defendant’s numerous faults and  
should be indemnified.  
In the specific circumstances of the Castor file, same conclusions would ensue  
should the Court come to the conclusion that she has to apply the New  
Brunswick or the Ontario common law.  
500-05-001686-946  
PAGE: 5  
Defendants’ position  
[
20] Defendants submit that:  
•
Castor’s audited consolidated financial statements for 1988, 1989 and 1990 were  
not misstated and the results of Castor’s operations and the carrying values of its  
loans were fairly presented in accordance with generally accepted accounting  
principles (“GAAP”).  
•
•
Subsidiarily, if the Court concludes otherwise, Castor was one great «theatre of  
misconception» and the fraud was so pervasive that it prevented C&L from  
uncovering the true nature of the misstatements on the financial statements.  
The governing law is the New Brunswick common law, in light of the corporate  
legislation applicable to Castor (“lex societatis”). If the Court comes to the  
conclusion that the lex societatis does not apply :  
!
Ontario common law applies to the Widdrington case, where  
Widdrington resided and where his prejudice occurred, if any; and,  
!
Various other laws apply to the other cases, depending on the  
domicile of the plaintiffs and the location of their respective  
prejudice.  
•
None of the investments made by Widdrington can be attributed to his reliance  
upon the auditor’s reports on the financial statements of Castor, the valuation  
letters signed by C&L or the Legal for Life Certificates issued to McCarthy  
Tétrault with respect to its Legal for Life Opinions. Overwhelming evidence  
clearly shows that the determinative factor that led to Widdrington’s investments  
was his absolute faith and blind trust in Stolzenberg.  
•
•
Defendants are not and should not be held liable for Widdrington’s alleged  
damages.  
In the specific circumstances of the Castor file, same conclusions would ensue  
should the Court come to the conclusion that she has to apply Quebec civil law.  
Th e J u dgm en t ’s con t en t (road-m ap an d  
feat u res)  
[21] Writing clear and complete but concise reasons represents a titanic challenge.  
500-05-001686-946  
PAGE: 6  
[
22] Evidence focuses on hundreds of corporations, numerous individuals involved  
and quite a few real estate projects.  
9
[
23] Above and beyond the testimonies rendered viva voce by 30 witnesses during  
over 260 days of hearing (between January 14, 2008 and May 2010), the evidence  
namely includes:  
•
•
•
More than 100 days of examination of twenty-five C&L staff members and  
10  
partners that took place in the 90s;  
1
1
Thousands of pages of thirteen rogatory commissions that took place between  
1998 and 2003;  
Thousands of pages of testimonies rendered on discovery or during the first trial  
which were introduced into the court record by notice under section 398.1 C.p.c.,  
by consent or further to judgments rendered by this Court during the second  
1
2
trial ;  
9
1
Lay witnesses: Harold James Blake, Harald Boberg, Mari Elizabeth Ford, Bernard Gourdeau, Barry  
MacKay, Norman Martin, Jean Guy Martin, Ingrid O’Connor, Walter Prychidny, Paul Quigley, Cynthia  
Rancourt, Ronald Smith, Kunjar M. Sharma, Manfred Simon, Ruth Tooke, Udo E.O. Riedel, Helmut  
Schreyer, Heinz Schoeffel, Elliot C. Wightman; Expert witnesses: John Campion, Earl Cherniak,  
Kenneth Froese, Russell Goodman, John Kingston, Alain Lajoie, Alain Lapointe, Phillip Levi,  
Lawrence S. Rosen, Donald Selman and Keith Vance  
0
Examinations of the following persons: Elliot C. Wightman, Michael Hayes, Michael Pollock, Mari  
Elizabeth Ford, Misti Jordan, Tarek Kassouf, Martine Picard, Martin Quesnel, François Quintal, Daniel  
Séguin, Jean Guy Martin, John Grezlak, Zymunt Marcinski, David Hunt, Linda Belliveau, Kenneth  
Mitchell, Penny Heselton, Stéphane Joron, Gary Hassard, Donald Higgins, Pierre Lajeunesse, Bruce  
Wilson, Janet Cameron, Allan Cunningham and John Bolton. (for the precise dates of those  
examinations – see the minutes of trial of January 7, 2008, annex C)  
1
1
2
Examinations of the following persons: Jurg Bänziger, Gaston Baudet, James G. Binch, William P.  
Cunningham, Lellos Demetriades, David T. Smith, Harold B. Finn, Ernst Gross, Antonios Hajiroussos,  
Clifford A. Johnson, James F. Moscowitz, Ira Strassberg and Michael Zampelas.  
1
Examinations on discovery of the following witnesses : Bernard Gourdeau, Ronald Smith, Michael  
Dennis, Elliott Wightman, Peter Widdrington and Heinz Prikopa (see minutes of trial of January 7,  
2
008, at pages 4 and 5 with attached annexes); Transcriptions from the first trial produced further to  
an agreement between the parties and with the consent Court: Christine Renaud, Soo Kim Lee,  
Leonard Alksnis, Peter Widdrington, Heinz Prikopa, George Taylor, Fitzsimmons, Jarislowsky,  
Lowenstein, Morrison and Lajoie (see the minutes of trial of January 7 and 8, 2008; the minutes of  
trial of March 3, 2008 and the minutes of trial of ). Extracts of the transcriptions of the testimony  
rendered by David Whiting in the first trial (see the minutes of trial of December 8, 2009 , pages 5 and  
6
and annexe A (pages 12 to 20) and the minutes of trial of December 10, 2009 and transcription of  
December 10, 2009 pp. 4-5); Extracts of various transcripts produced into the Court record further to  
judgments rendered (see namely Judgments rendered on January 27, 2009, April 3, 2009, April 6,  
2009 and May 13, 2009)  
500-05-001686-946  
PAGE: 7  
•
More than 5,000 exhibits representing several hundred thousand pages, of which  
1
3
experts’ reports produced by the 14 expert witnesses and relating to the  
following topics: generally accepted accounting principles, generally accepted  
auditing standards, fraud and the auditor, preparation of share valuation reports,  
principles of due diligence applicable to the purchase of shares in a private  
corporation, principles of common law relating to negligence and liability further  
to a misrepresentation and an alleged pure economic prejudice and Canadian  
and American economy in the late 80s and early 90s.  
[
24] Hoping to facilitate the reading and the understanding of the reasons that lead  
her to her conclusions, the Court introduces a road-map, and some features, of the  
present judgment.  
Road-map  
[25] The Court follows the following road-map:  
•
•
•
•
•
Description of some historical background of the trial.  
Enunciation of her main conclusions.  
Introduction of the main players and topics through a “who’s who section”.  
Description of the issues and of the task.  
Analysis of the negligence issue as it relates to the consolidated audited  
financial statements of 1988, 1989 and 1990.  
•
•
•
•
•
•
•
Analysis of the negligence issue as it relates to the valuation letters.  
Analysis of the negligence issue as it relates to the Legal for Life Certificates.  
Analysis of the reliance issue.  
Analysis of the liability issue, including the applicable law.  
Analysis of the damages issue.  
Analysis of the costs issue.  
The conclusions.  
1
3
John Campion, Earl Cherniak, Kenneth Froese, Russell Goodman, Stephen A. Jarislowsky, John Paul  
Robert Kingston, Alain Lajoie, Alain Lapointe, Phillip Levi, Paul J. Lowenstein, Donald C. Morrison,  
Lawrence S. Rosen, Donald Selman and Keith Vance  
500-05-001686-946  
PAGE: 8  
Features  
[
26] An alphabetical list of names, abbreviations and main technical expressions is  
14  
attached to the present judgment as a reading tool.  
[
[
27] A detailed table of content is also attached to the present judgment.15  
28] Summarizing all evidence is impossible: therefore, the Court relates the relevant  
evidence, as she understands it, issue by issue, referencing through footnotes as much  
as possible.  
[
29] Early on in the judgment, the reader will find some general remarks on credibility  
and reliability of evidence. Additional remarks, with explanations and illustrations, are  
made under relevant and specific headings and subheadings of the judgment. General  
and additional remarks complement one another.  
Hist orical back grou n d  
[
30] Further to Castor’s bankruptcy in 1992, many lawsuits were instituted in the early  
0s, all plaintiffs making similar allegations of professional negligence against Coopers.  
9
[
31] From the outset, a judge was designated to manage and coordinate all these  
16  
cases .  
th  
[
32] On February 20 , 1998, a ruling was made «to ascertain that the issues raised in  
these actions be tried as efficiently, expeditiously and inexpensively as possible while  
never losing sight that our conception of justice is a delicate balance of right results, fair  
procedures and effectiveness» .  
1
7
•
•
One case was selected to proceed first: «the Widdrington case».  
All of the other Castor related cases were suspended pending the outcome of the  
Widdrington case.  
•
Plaintiffs in all the other Castor related cases were given status in the  
Widdrington trial, on the common issues.  
1
1
1
4
5
6
Schedule 1 to the present judgment  
Schedule 2 to the present judgment  
In 1996, Justice Carrière took over from Justice Halperin who himself had taken over from Justice  
Gomery  
17  
Ruling of Justice Paul Carrière of February 20, 1998  
500-05-001686-946  
PAGE: 9  
•
On the common issues, such as Coopers’ negligence and the relevant governing  
law, the judgment in the Widdrington case was binding on all the other Castor  
related cases.  
[
33] A first trial, that started in September 1998 and lasted no less than eight years,  
was aborted because of the judge's illness and his inability to resume its conduct.  
th  
[
34]  
On September 7 , 2007, chief Justice François Rolland ordered a new trial and  
1
8
designated the undersigned to preside it.  
th  
th  
[
35] The second trial commenced on January 14 , 2008 and ended on October 4  
2
010 when the case was taken under advisement.  
[
36] On all the common issues, the present judgment has a binding effect on all the  
pending lawsuits brought before the Superior Court by creditors of Castor against  
Defendants. Those pending lawsuits are identified in Annex A of the trial minutes of  
1
9
March 12, 2008 .  
Cou rt ’s m ain con clu sion s  
[
37] For the reasons set out in the present judgment, the Court has come to the  
following main conclusions:  
•
•
•
•
•
•
the audited consolidated financial statements of Castor for 1988 are materially  
misstated and misleading;  
the audited consolidated financial statements of Castor for 1989 are materially  
misstated and misleading;  
the audited consolidated financial statements of Castor for 1990 are materially  
misstated and misleading;  
C&L failed to perform their professional services as auditors for 1988 in  
accordance with the generally accepted auditing standards (“GAAS”);  
C&L failed to perform their professional services as auditors for 1989 in  
accordance with GAAS;  
C&L failed to perform their professional services as auditors for 1990 in  
accordance with GAAS;  
1
8
9
Widdrington c. Wightman, 2007 QCCS 6881  
1
A copy of this is attached to the present judgment, as schedule 3, to form part hereof  
500-05-001686-946  
PAGE: 10  
•
•
•
•
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1988 (valuation letters and certificate for Legal for Life Opinion);  
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1989 (valuation letters and certificate for Legal for Life Opinion);  
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1990 (valuation letters and certificate for Legal for Life Opinion) ;  
C&L issued various faulty opinions relating to Castor’s financial position during  
1991 (valuation letters and certificate for Legal for Life Opinion);  
•
•
•
The governing law is Quebec civil law;  
Widdrington’s reliance on Defendants’ professional opinion was reasonable;  
As a direct result of C&L’s negligence, Widdrington did suffer some damages and  
shall be indemnified by C&L accordingly;  
•
The Court would have come to the same conclusions had she had to apply the  
New Brunswick or the Ontario Common law.  
Wh o’s wh o  
[
38] The objective of this “who’s who” section is not to draw an exhaustive list of all  
entities involved but to introduce the main players and topics.  
[
39] The main players and topics are: Castor, Stolzenberg, Wost group of companies  
“Wost group”), Ingrid O’Connor (“O’Connor”), Ronald Smith (“Ron Smith”), Manfred  
(
Simon (“Simon”), Barry MacKay (“Mackay”), George Dragonas (“Dragonas”), Socrates  
Goulakos (“Goulakos”), Edwin Bänziger (“Bänziger”), Ernst Gross (“Gross”), Marco  
Gambazzi (“Gambazzi”), the Cooper’s audit teams, various partners of Cooper’s firms  
located outside Canada, the York Hannover companies (“YH Group”), Karsten Von  
Wersebe (“Wersebe”), David Whiting (“Whiting”), Walter Prychidny (“Prychidny”), the  
DT Smith group of companies (“DT Smith”), David T. Smith (“David Smith”), James  
Moscowitz (“Moscowitz”), Ira Strassberg (“Strassberg”), McLean & Kerr and some  
real estate properties financed by Castor.  
Castor  
[
40] Castor Holdings Inc. was founded in 1975 as a privately owned investment  
banking and finance organization by Stolzenberg and Wersebe.  
500-05-001686-946  
PAGE: 11  
[
41] Castor Holding Limited (“CHL”) was incorporated on December 29, 1977 by  
2
0
letters patent in the Province of New Brunswick .  
[
42] CHL purchased the net assets of the previous parent company, Castor Holdings  
2
1
Inc., effective January 1, 1978 .  
[
43] The initial balance sheet of CHL, as at January 1, 1978, disclosed total assets of  
22  
3,969,726$ .  
$
[
44] Wersebe was the chairman of CHL from 1977, date of its inception, until 1986  
23  
and was a director until 1987 . Stolzenberg was the president and the chief executive  
2
4
officer, a director, and succeeded Wersebe as chairman in 1986 .  
45] Castor’s subsidiaries included CH International Finance NV (“CHIF”) located in  
[
2
5
Curacao (Netherlands Antilles) , Castor Finance AG (“CFAG”) located in Zug  
26  
Switzerland) , CH International Netherlands BV (“CHINBV”) located in Rotterdam (the  
27 28  
(
Netherlands) , CH International Overseas Ltd. (“CHIO”) located in Cyprus and CH  
2
9
Ireland Inc. (“CHII”) located in Dublin (Ireland) .  
[
46] The accounting for the Canadian operations and the corporate consolidation was  
performed in Montreal at Castor’s offices. The accounting records for a number of the  
subsidiaries were maintained in Zug (Switzerland) and Schaan (Lichtenstein) by  
companies called Aurea Treuhand and Global Management.  
[
47] The company’s assets grew from $643 million in 198630 to $1,871 billion in  
31  
990 . Castor nearly tripled in size in those four years. Castor’s growth was  
1
exceptional.  
[
48] The growth in Castor’s loan portfolio consisted mainly of loan disbursements to  
fund construction costs, renovation costs, upgrading costs, holding costs and operating  
expenses and loan increases to enable borrowers to pay interest on their existing loans.  
2
2
2
2
0
1
2
3
PW-2400-8 (bates 015926 to 015937)  
PW-2400-14 (bates 016045 and 016046)  
PW-1053-7, sequential pages 3 to 21  
PW-2400-13, PW-2400-74, PW-2400-79, PW-2400-84, PW-2400-85, PW-2400-92 (bates 017617),  
PW-2400-94, PW-2400-95, PW-2400-98  
24  
PW-2400-13, PW-2400-74, PW-2400-79, PW-2400-84, PW-2400-85, PW-2400-86, PW-2400-91, PW-  
2400-92, PW-2400-98  
25  
26  
27  
28  
PW-2400-18, PW-2400-20 and PW-2400-42 (bates 016638 and 016639)  
PW-2400-18, PW-2400-20 and PW-2400-42 (bates 016638 and 016639)  
PW-2400-29 (bates 016301), PW-2400-34 (bates 016396)  
PW-2400-75 (bates 017084), PW-2400-98 (bates 017713 and 017714), PW-2400-101 (bates 017783)  
and PW-2400-102 (bates 017817)  
29  
PW-2400-75 (bates 017084), PW-2400-98 (bates 017713 and 017714), PW-2400-101 (bates 017783)  
and PW-2400-102 (bates 017817)  
3
0
1
Consolidated audited financial statements for the year ending on December 31, 1986 : PW-5, tab 8  
Consolidated audited financial statements for the year ending on December 31, 1990 : PW-5, tab 12  
3
500-05-001686-946  
PAGE: 12  
[
49] Castor’s two main clients, the YH Group and the DT Smith Group, relied almost  
exclusively on Castor’s willingness to annually capitalize interest on outstanding loans  
through the granting of new loans and increasing existing loans. The YH Group portfolio  
represented Castor’s most significant portfolio of loans throughout the period. Castor  
essentially became the financing arm of the YH North American Group.  
[
50] On February 26, 1992, an Order was issued granting CHL court protection until  
June 26, 1992. On July 9, 1992, CHL was adjudicated bankrupt as of March 26, 1992  
and Richter and Associates were appointed Trustee in Bankruptcy.  
[51] Castor was like a coin – it had two sides: the appearances and the reality.  
Appearances  
[
52] Castor held itself out to its investors and lenders as a spread lender who earned  
profits based on the difference between its cost of borrowing and the rates at which  
such funds could unfold by way of loans to its own borrowers.  
[
53] In corporate brochures, circulated during the period of 1987 to 1991, Castor  
described itself and its business as follows:  
Since its inception, Castor has focused on short and medium term loans in  
the North American mortgage market. These investments have been for its own  
account, as well as on behalf of a growing international clientele.  
Castor’s preferred investments are first and second mortgage interim loans  
on income producing properties (i.e. office, commercial, hotels, industrial and  
apartment buildings), well located in major urban areas. Castor’s primary  
investment activities include:  
•
Purchase and placement of first and second mortgages for terms  
between six months and two years;  
•
Interim financing for construction and development secured by mortgages  
and take-out commitments.  
(
…)  
During 1987, the Company placed mortgage loans of about $250 million in  
Canada and the United States, which were refinanced in Europe and Canada.  
Castor currently administers directly or in trust for its clients, mortgage loans  
in excess of $800 million. All proposed investments are reviewed and  
thoroughly evaluated by Castor’s experienced personnel, prior to commitment.  
Underwriting standards are high and, in addition, particular attention is given  
to the Company’s policy that loans are not to exceed 75% to 80% of the  
500-05-001686-946  
PAGE: 13  
estimated market value. Careful attention is also paid to asset and liability  
32  
matching and maturities in order to provide funding stability” (our emphasis)  
[
54] The audited consolidated financial statements of Castor disclosed that Castor’s  
business was highly successful and profitable in that Castor could grow dramatically its  
asset base, revenues and earnings between 1978 and 1990.  
Reality  
[
55] Very few loans made by Castor were short-term loans: at contractual maturity,  
Castor had no choice but to renew them, year after year.  
[
56] Castor made and renewed loans to borrowers when it was obvious that such  
borrowers would not be capable of meeting their financial obligations. Castor acted  
more as an equity partner than as a lender.  
[
57] Virtually, none of Castor’s borrowers (save in those rare cases where a borrower  
was a true third party) respected its financial obligations or other loan covenants to  
Castor.  
[
58] In 1988, 1989 and 1990, new loans were rarely secured by real estate mortgage,  
they were mainly equity loans.  
[
59] In 1988, 1989 and 1990, loans clearly exceeded 75% to 80% of the estimated  
market value, the Castor’s publicized loan to value ratio.  
[
60] At least 90% of the interest and fee income recorded during each of the three  
relevant years (1988, 1989 and 1990) in respect of the entire Castor loan portfolio was  
composed of capitalized interest and fee.  
[
61] The greater the failure of its borrowers to satisfy their loan obligations, the more  
revenue Castor could recognize.  
[
62] Castor had no choice but to raise ever increasing amounts of money from  
lenders and investors in order to satisfy its outstanding and exponentially increasing  
financial obligations as well as to support its borrowers’ insatiable cash needs.  
Stolzenberg , the Wost group and O’Connor  
[
63] At all relevant times, Stolzenberg was the president and chief executive officer of  
Castor.  
3
2
PW-1057-1, at page 4 (to the same effect generally, except for the figures that are updated, see also  
PW-1057-2 (1988) and PW-1057-3 (1989)  
500-05-001686-946  
PAGE: 14  
[
64] At all relevant times, Stolzenberg was also president and shareholder of Wost  
3
3
Holding Ltd .  
[65] Stolzenberg was involved in a multitude of other corporations.  
[
66] O’Connor started as a bookkeeper for the Wost Group in 1977, when she moved  
3
4
to Montreal with her husband. She worked for the Wost group of companies  
three  
days a week, and she was its sole employee until 1993. She speaks German, English  
and some French.  
[
67] Before she joined the Wost group, O’Connor had worked for approximately 9 and  
years as a secretary to the president of Thorne Riddell in Toronto and had done  
some accounting work there, but without formal training in accounting.  
½
35  
68] The companies she was handling included Wost Holdings Ltd. , Wost  
36  
[
Development Corporation, 97872 Canada Inc. (“97872”) , 612044 Ontario Ltd.  
3
7
38  
39  
(
“612044”) , 606752 Ontario Ltd. (“606752”) , 166505 Canada Inc. (“166505”) and  
40  
87292 Ontario Ltd. (“687292”) .  
6
[
69] Her functions consisted namely in:  
•
Setting up the filing system and the accounting books and records, including their  
cash receipts, cash disbursements and general ledgers;  
•
Handling correspondence, invoices, payments and bank transfers and bank  
reconciliation;  
•
•
Preparing analysis and trial balances at year-end for the audits;  
Acting as an officer for corporations of the Wost group and, in that capacity,  
4
1
signing reports, resolutions and agreements .  
[
70] O’Connor performed tasks for Castor while an employee of the Wost group: she  
handled compilation of statistical information on a spreadsheet, and updated same on a  
3
3
3
3
4
5
Compendium PW-340  
PW-292  
PW-317, PW-318 A, PW-318 B, PW-318 C, Pw-319, PW-320, PW-321, PW-322 and Compendium  
PW-340  
36  
37  
38  
39  
40  
41  
PW-292, PW-323, PW-324, PW-325, PW-338 and PW-339  
PW-292, PW-326, PW-327, PW-328, PW-338 and PW-339  
PW-292, PW-329, PW-330, PW-331, PW-338 and PW-339  
PW-292, PW-332, PW-333, PW-334, PW-338 and PW-339  
PW-292, PW-335, PW-336, PW-337, PW-338 and PW-339  
O’Connor, January 14, 2009, pages 35-36 (for more details see also cross examination, O’Connor,  
January 15, 2009, pages 55 to 71)  
500-05-001686-946  
PAGE: 15  
monthly basis, in the Roxy Petroleum file, an investment Castor had made in oil  
4
2
production in Western Canada.  
Ron Smith, Simon and MacKay  
Ron Smith  
[71] Ron Smith was employed by CHL from March 1980 to June 1992.  
[
72] In 1968, Ron Smith obtained a Bachelor of Science degree from Bishop's  
University, a Bachelor’s degree in Business Administration in 1970 from same, and a  
4
3
Master’s degree in Business Administration from Queens University in 1972 .  
73] He started his employment history with Nesbitt Thompson Company and, after  
[
he graduated from Queens, he worked in their corporate finance department until  
44  
974 .  
1
45  
[
74] In 1974, Ron Smith joined the Mercantile Bank of Canada working in one of its  
branches as a person in charge of analyzing credit applications and proposals, getting  
them approved by the bank, negotiating documents with lawyers, closing and  
monitoring thereafter the transactions with the bank’s credit department.  
[
75] In 1976, he was transferred to the credit supervision of the head office, as  
assistant vice-president. In charge of a large real estate portfolio and managing a team  
of people, and like other account officers in the bank, he had a dream: to join a real  
4
6
estate company .  
[
76] In 1978, he left the Mercantile Bank for Mondev International, a real estate  
development company based in Montreal that he joined as a financial and development  
officer.  
[
77] In 1979, he met with Wersebe, who was looking for a vice-president finance for  
YHDL. Stolzenberg was present at that meeting. Ron Smith did not get the position with  
YHDL. However, in March 1980, he was hired by CHL as manager of mortgage  
4
7
investments .  
4
2
O’Connor, January 14, 2009, page 36 (for more details on circumstances, see also cross examination,  
O’Connor, January 15, 2009, pages 55 to 60)  
Smith, May 14, 2008 at pages 8 and 9  
43  
44  
45  
46  
47  
Smith, May 14, 2008 at page 9  
Smith, May 14, 2008 at page 9  
Smith, May 14, 2008 at page 13  
Smith, May 14, 2008 at pages 14 to 16  
500-05-001686-946  
PAGE: 16  
[
78] He was attributed various titles while working for Castor and over the years was  
promoted from manager to senior vice president.  
Simon  
[79] From July 1981 to April 1992, Simon worked at Castor.  
[
80] Simon obtained a Bachelor of Commerce from the University of Toronto in 1968  
4
8
and an MBA from York University in Toronto in 1972 .  
[
81] In 1968, he joined the Toronto-Dominion Bank in Toronto. Until 1974, he spent  
most of his time in the branch system as a loan officer or manager of a team of loan  
officers. At the end of 1974, and until 1980, Simon joined the international division of the  
4
9
bank and worked for that division, mainly in Frankfurt . Simon speaks German.  
[
82] In 1980 and 1981, he worked for the TD Bank in Calgary in their national  
accounts’ division servicing companies in the oil and housing industries in Western  
Canada.  
[
83] In 1981, Simon saw an ad. Head hunters out of Toronto were looking for  
someone who had an international banking background to join a growing company in  
5
0
the financial sector . He answered this ad, met with Wersebe and Stolzenberg in YH  
5
1
offices in Toronto and ended up being hired by CHL, as a vice-president .  
MacKay  
[
84] Mackay is a Certified General Accountant. He obtained his degree in 1976, from  
52  
McGill University, through the evening program.  
[
85] From 1973 to 1976, he worked for Trizec as manager, handling revenue  
producing properties such as Place Ville Marie, BCN building, 360 St-Jacques.  
[
86] From Trizec, he worked at Hercules Canada as a financial analyst for a year and  
thereafter at the Mercantile Bank, as a senior administration officer in charge of four  
5
3
departments: mortgage, payroll, reports and accounting .  
[
87] From 1980 to 1992, he worked for Castor as manager of administration, in  
5
4
charge of accounting and foreign exchange operations .  
48  
49  
50  
51  
52  
53  
Simon, April 23, 2009, at page 81  
Simon, April 23, 2009, at pages 83 to 85  
Simon, April 23, 2009, at page 88  
Simon, April 23, 2009, at page 89  
MacKay, August 24, 2009, at page 64  
MacKay, August 24, 2009, at pages 64-65  
500-05-001686-946  
PAGE: 17  
[
88] From 1988 to 1990, his official title at Castor was “manager of administration,  
5
5
manager of special projects” .  
56  
89] Ruth Tooke, Cynthia Rancourt and Christa Karl reported to MacKay .  
[
5
7
•
•
•
Ruth Tooke (“Tooke”) was responsible for general accounting . She was hired  
in 1979 by Stolzenberg to work for Castor and her employment was terminated  
5
8
on March 13, 1992 . While reporting to Mackay, she also interacted with Ron  
5
9
Smith of the mortgage department.  
From 1986 onwards, Cynthia Rancourt (“Rancourt”) assisted Tooke in the  
6
0
general accounting : she was responsible for posting cash receipts, cash  
6
1
disbursements and several other entries and had other responsibilities . While  
reporting to Tooke and MacKay, Rancourt also interacted with Ron Smith.  
Christa Karl (“Karl”) took care of the funding side of Castor’s operations, i.e. the  
shareholders and the loans to Castor and the investments in Castor. While  
6
2
reporting to MacKay, Karl also interacted with Simon .  
Dragonas and Goulakos  
[
90] Dragonas and Goulakos are chartered accountants, both former C&L  
employees, who exercised their profession together as partners.  
[
91] Dragonas and Goulakos performed accounting and consulting services for  
Castor: their services included administration services in respect of the Montreal Eaton  
6
3
Centre, “accounting assistance” on a monthly basis and “supplementary services” .  
[
92] Dragonas and Goulakos were also contacts for Coopers for the purpose of their  
audit of the consolidated financial statements of Castor.  
[
93] While they were performing accounting services for Castor, they also provided  
similar services for Stolzenberg and companies of the Wost group.  
5
5
5
5
5
5
6
6
4
5
6
7
8
9
0
1
MacKay, August 24, 2009, at page 65  
MacKay, August 26, 2009, at pages 31-32  
MacKay, August 24, 2009, at page 66  
MacKay, August 24, 2009, at page 66; Tooke, February 28, 2008, at page 26  
Tooke, February 27, 2008 at page 53  
MacKay, August 24, 2008, at page 67  
Rancourt, February 29, 2008, at pages 150 and 151  
Tooke, February 27, 2008, at page 60; Rancourt, February 29, 2008, at pages 169 to 171; Rancourt,  
March 3, 2008 at pages 22 to 25  
62  
3
MacKay, August 24, 2009, at page 67  
6
D-20 and D-21  
500-05-001686-946  
PAGE: 18  
Bänziger and Gross  
[
94] Bänziger provided accounting and administrative services for Castor and its  
subsidiaries through and on behalf of his company Global Management Limited  
“Global”). He was particularly instrumental in the banking and wire transfers between  
Castor, its subsidiaries and their respective creditors and debtors.  
(
[
95] Bänziger was a Director of one of Castor’s subsidiaries, C.H. (Ireland) Inc.  
96] Bänziger was a principal contact for Coopers, along with Stolzenberg, with  
[
respect to the audits of the financial statements of the subsidiaries of Castor. He also  
assisted in the preparation of the unaudited consolidated financial statements of Castor,  
including the June 30 statements.  
[
97] His son, Jurg Bänziger (“Jurg Bänziger”), worked with him and also provided  
accounting and administrative services for Castor.  
[
98] Gross worked in Zug (Switzerland) from 1985 to 1987. He worked exclusively for  
and was responsible for the foreign exchange and money market sections of Castor's  
6
4
overseas subsidiaries .  
[
99] At the end of 1987, Gross went to work in Schaan (Liechtenstein) because the  
6
5
work he had been doing previously in Zug was transferred to Global in Schaan .  
[
100] In March or April, 1990, Gross also took over responsibility for the loan files of  
Castor's overseas subsidiaries. From that point forward, he was in charge of the  
administration of the loan files, including documentation relating to the renewal or  
prolongation of loans, making pay outs, and applying incoming funds to the right  
loans.66  
[
101] Throughout his engagement for Global, Gross worked exclusively for Castor's  
67  
overseas subsidiaries .  
Gambazzi  
[
102] Gambazzi is a lawyer in Lugano (Switzerland) acting for several investors in  
Castor, individuals and corporations, who wanted to remain anonymous.  
64  
65  
66  
67  
Gross, September 28, 1998, pages 14 to 17  
Gross, September 28, 1998, pages 18 to 20  
Gross, September 29, 1998, pages 270-271 and 347-348  
Gross, September 28, 1998, pages 38-39  
500-05-001686-946  
PAGE: 19  
[
103] Gambazzi was a shareholder of Castor through companies he owned or  
controlled, and a Director and a Managing Director, with signing authority, of the  
offshore subsidiaries of Castor.  
Coopers - Castor’s audit teams and Coopers Partners  
in other jurisdictions  
Castor’s audit teams  
[
104] Coopers has acted as auditor for CHL since its inception and Wightman has  
always been the engagement partner in charge of the audit and of the Castor file in  
general.  
[
105] Members of Castor’s audit teams, in Montreal and overseas, have come and  
gone over the years.  
[
106] Between 1986 and 1990, while Castor nearly tripled in size, the size of the teams  
remained about the same, as well as the time spent on audit work in the field, and the  
rollover of personnel was noticeable.  
[
107] John Grezlak was involved with the Montreal audits from 1982 to 1987, as audit  
68  
manager, but he left Coopers in October 1988 .  
[
108] Bruce Wilson was involved with Castor’s overseas audit, as audit manager, from  
69  
985 to 1987 inclusively, but he left Coopers in August of 1988 .  
1
[
109] Even if he remained the partner responsible for the overseas audit until the end,  
Jean Guy Martin, who had personally been involved with the supervising on the site of  
7
0
the overseas audit work since 1982, ceased going to Europe after the 1988 audit.  
The 1988 audit teams  
71  
110] In 1988, the Montreal audit team included Kenneth Mitchell (audit manager ),  
72 73  
[
Martine Picard (supervisor), Daniel Séguin for a certain period of time (senior), Linda  
7
4
75  
Belliveau (senior) , John Talbot (staff assistant) and Charles Soroka (staff assistant) .  
68  
69  
70  
71  
72  
73  
74  
Grezlak, January 4, 1996, pages 8 to 10  
Wilson, October 28, 1996, pages 6 to 9  
Martin, December 18, 1995, pages 7 to10: Martin, January 5, 2010, pages 71, 72, 76, 81 to 94  
Mitchell, April 22, 1996, pages 2 to 5  
Seguin, December 11, 1995, page 14; Picard, December 6, 1995, pages 7, 8, 18, 23, 79 and 93  
Seguin, December 11, 1995, pages 8 to 15  
Picard, December 6, 1995, pages 7, 8, 18, 23, 79 and 93  
500-05-001686-946  
PAGE: 20  
[
111] In 1988, the overseas audit team included Jean-Guy Martin (partner), Mari  
Elizabeth Ford (audit manager) and Janet Cameron (audit manager).  
The 1989 audit teams  
[
112] In 1989, the Montreal audit team included Kenneth Mitchell (audit manager),  
76  
Penny Heselton (supervisor), Linda Belliveau (senior ), Stephane Joron (staff), Pierre  
Lajeunesse (junior, staff assistant) and Mitsy Jordan (junior, staff assistant).  
[
113] In 1989, the overseas audit team included Mari Elizabeth Ford (audit manager)  
77  
and Tarek Kassouf (audit supervisor) .  
The 1990 audit teams  
[
114] In 1990, the Montreal audit team included François Quintal (audit manager),  
78  
David Hunt (supervisor), Robert Wagstaff for one week (senior) and Martin Quesnel  
7
9
80  
for one week (senior), David Pascal (staff assistant ) and Michael Pollock (staff  
8
1 82  
assistant ).  
[
115] In 1990, the overseas audit team included Mari Elizabeth Ford (audit manager)  
8
3
and Tarek Kassouf (audit supervisor) .  
Coopers’ partners in other jurisdictions  
William P. Cunningham  
[
116] William P. Cunningham (“Cunningham”) was a partner in Coopers & Lybrand  
84  
Ireland from 1987 to 1991 . He had joined Coopers & Lybrand Ireland in 1973 and  
qualified as a chartered accountant in 1976. Between 1976 and 1979, he worked in  
Coopers & Lybrand, Ireland; between 1979 and 1981 in Coopers & Lybrand, Germany;  
8
5
and from 1981 onwards, was back with Coopers &Lybrand Ireland .  
75  
76  
77  
78  
79  
80  
81  
82  
83  
84  
85  
Picard, December 6, 1995, pages 7, 8, 18, 23, 79 and 93  
Belliveau, April 1, 1996, page 21  
Kassouf, November 17, 1995, pages 7 and 14  
Hunt, March 28, 1996, page 24  
Hunt, March 28, 1996, pages 34 and 35  
Hunt, March 28, 1996, page 171  
Hunt, March 28, 1996, page 167  
Quintal, December 1, 1995, page 73  
Kassouf, November 17, 1995, page 14  
Cunningham, November 24, 1998, page 11  
Cunningham, November 26, 1998, pages 29-30  
500-05-001686-946  
PAGE: 21  
[
117] He did the audit of CHI in 1989 and 1990 but the audit for 1991 was never  
8
6
completed .  
[
118] His role was to carry out the local statutory audit, which is what Coopers &  
Lybrand Ireland was appointed to do. Since C&L wanted to include the figures that  
related to CHI in the consolidated figures, C&L needed a certain amount of work done  
by Coopers & Lybrand Ireland on those figures. In that capacity, and during various  
8
7
periods of time, he interacted with C&L, namely with Mitchell .  
Clifford Johnson  
[
119] Clifford Johnson (“Johnson”) was a partner in Partner of Coopers & Lybrand  
88  
Bahamas .  
[
120] As were two other partners in Coopers & Lybrand Bahamas, he was invited to  
act for companies incorporated at the behest of Wightman: Chur Investments Limited  
(
(
“Chur”), Petra Investments Limited (“Petra”) and Sloppin Investments Limited  
“Sloppin”). He discharged the duties of a director, something with which he was  
familiar, and that he understood.  
[
121] Chur was a trust formed under the laws of the Cayman Islands that was  
89  
dissolved in December 1985 . The shareholders that remained involved with Chur until  
it was dissolved invested in Petra.  
90  
[
122] Petra was created under the laws of the Turks & Caicos Islands in 1983 . Its  
three directors were partners of Coopers & Lybrand Bahamas. Shareholders included  
9
1
Stolzenberg, Simon, Ron Smith, MacKay, CHIF and Wightman’s wife, Ruth Wightman .  
Petra raised funds, which were invested through Sloppin, its wholly-owned subsidiary  
and operating entity.  
[
123] Johnson’s understanding of the Chur, Petra and Sloppin organization was to  
permit friends and business associates of Wightman to invest and obtain a better than  
9
2
average return and to convert investment income into capital income .  
86  
87  
88  
89  
90  
91  
92  
Cunningham, November 24, 1998, page 32  
Cunningham, November 24, 1998, pages 42 and 44  
Johnson, October 27, 1998, page 12  
Johnson, October 27, 1998, page 31  
Johnson, October 27, 1998, page 38 and PW-345 and PW-346  
Johnson, October 27, 1998, pages 39 to 52  
Johnson, October 27, 1998, page 63  
500-05-001686-946  
PAGE: 22  
Antonio Hajiroussos and Michael Zampelas  
[
124] During the period between 1987 and 1991, and until July 1998, Antonio  
Hajiroussos (“Hajiroussos”) was a partner of Coopers & Lybrand, Cyprus. He was in  
charge of the department relating to the administration of the offshore companies which  
9
3
did not have their own offices in Cyprus . Since Castor’s Cyprus subsidiaries had their  
own offices in Cyprus, he was not involved with them as much as he was with other  
entities. However, he had banking signing authority and was receiving instructions from  
Bänziger and Stolzenberg. He met Stolzenberg a few times in Cyprus and once in  
Canada.  
[
125] Between 1987 and 1991, Michael Zampelas (“Zampelas”) was also a partner of  
Coopers & Lybrand, Cyprus. In fact, he was the president and the managing partner of  
the firm.  
[
126] From their respective inception and until they ceased to operate, Coopers &  
Lybrand, Cyprus were the auditors for CH Cyprus, CHIO and Enar Middle East Limited,  
9
4
95  
three subsidiaries of Castor under the responsibility of Dinos Papadopoulos .  
YH Group, Wersebe, Whiting and Prychidny  
YH group  
[127] The main corporations of the YH group to whom Castor loaned money are:  
•
•
York-Hannover Holdings Ltd. (“YHHL”) and its successor KvWIL, after a  
reorganisation and a winding-up of YHHL in 1987;  
York-Hannover Leisure Properties Ltd. (“YHLP”), and its predecessor York-  
Hannover Amusement Ltd. (“YHAL”);  
•
•
•
•
York- Hannover Developments Holdings Ltd. (“YHDHL”);  
York-Hannover Hotels Holdings Ltd. (“YHHHL”);  
Skyline Hotels (1980) Ltd. (“Skyline 80”), a wholly-owned subsidiary of YHHHL;  
York -Hannover Hotels Ltd. (“YH Hotels”);  
93  
94  
95  
Hajiroussos, March 18, 1999, pages 75 and 76  
Zampelas, March 15, 1999, pages 2 and following  
Zampelas, March 17, 1999, pages 62-63  
500-05-001686-946  
PAGE: 23  
•
York- Hannover Developments Ltd. (“YHDL”).  
Wersebe  
[
128] Wersebe was the president of Castor since its inception and until 1986, when  
Stolzenberg took over the position. Wersebe was also a shareholder (he owned 40% of  
the shares) until 1987, year in which Stolzenberg bought his 40% participation.  
[
129] At all times, Wersebe was also the directing mind of the York-Hannover group of  
corporations.  
Whiting  
[
130] After graduating from the university in 1968 and writing the final exams in 1971,  
Whiting became a chartered accountant. He received the silver medal for second place  
9
6
standing in Ontario, and he stood in the top twenty (20) in Canada that year .  
[
131] He joined Clarkson Gordon (now Ernst &Young) in 1968 and left in 1985. During  
the years at Clarkson Gordon, in their Ontario or New Brunswick offices, Whiting  
occupied various positions in different departments and had numerous responsibilities,  
within the firm, the Chartered Accountant Institute or other professional associations.  
[
132] In 1985, he joined the YH group as Vice-President, position he occupied until the  
97  
group dissolved.  
[
133] Whiting assumed responsibility directly for YHDL’s accounting and financial  
reporting and for corporations beneath the YHDL umbrella. His functions included direct  
income tax work and part of the functions of a Chief Financial Officer which include  
maintaining a relationship with some of the lenders such as Bank of Montreal (“BMO”),  
National Bank, Castor, occasionally the First Interstate Bank of Canada (“FICAN”), and  
with some of the partners such as Castor, the Confederation Life Insurance Company,  
9
8
and the group of companies called Camrost .  
[
134] He was Assistant-Secretary to all YH companies in North America, and  
Secretary of YHDL. He was a signing officer of all companies and had access to their  
corporate records and minute books. He dealt with lawyers who were acting on their  
9
9
behalf. He was involved in negotiating and executing documents .  
96  
97  
98  
99  
Whiting, November 10, 1999, page 11 and PW-1135  
Whiting, November 10, 1999, page 13 and PW-1135  
Whiting, November 10, 1999, pages 13 to 20  
Whiting, November 10, 1999, pages 19 to 24  
500-05-001686-946  
PAGE: 24  
Prychidny  
[
135] Prychidny was a graduate of Toronto University in 1974 and obtained a  
Bachelor’s degree in Commerce. He received his designation as a chartered accountant  
in 1976 and as a chartered business valuator (“CBV”) in 1980. That very same year, he  
wrote CBV exams and received the highest marks in Canada.  
[
136] Between 1974 and 1983, Prychidny worked for two firms of chartered  
accountants, the first being Price Waterhouse and Crawford, and the second Smith and  
Swallow, at the beginning in audits but mainly in the business valuation field. He also  
worked for Walker Industries, a corporation where he acted as Chief financial officer  
(
“CFO”).  
[
137] In October 1983, when he started in the hotel business, and until June 1990,  
Prychidny was associated to the YH group:  
•
•
In 1983, Prychidny joined the YH group as CFO of YHAL in Niagara Falls, where  
he and his wife had grown up and where they were looking forward to moving  
back.  
In 1985, at the request of Wersebe, he left YHAL and joined YHHL as Executive  
Vice President. His mandate was to upgrade the Skyline chain of hotels and to  
look after the management of those hotels and of the Maple Leaf Village  
1
00  
hotels .  
DT Smith, David Smith, Moscowitz and Strassberg  
DT Smith  
[
138] DT Smith was comprised of eight corporate entities and seven partnership  
entities. The general partner of the partnerships was a corporation whose stockholders  
were also the stockholders of each of the corporations. The entities were developers of  
single family homes and condominiums in California.  
David Smith  
[
139] After many years in various business fields, including insurance and commercial  
real estate, David Smith started a new business as a builder and developer of  
residential homes in Southern California.  
100  
Prychidny, October 14, 2009 pages, 37 to 40 and October 16, 2009, pages 20, 30 to 38  
500-05-001686-946  
PAGE: 25  
[
140] Prior to getting involved into this home building business, and acting as a broker  
David Smith had completed several transactions with Stolzenberg. To get financing, he  
1
01  
went to Stolzenberg .  
[
141] His first project in California was known as Wood Ranch 1. It was located in the  
102  
and included approximately 120 single family homes. Other projects  
Simi Valley  
followed.  
Moscowitz  
[142] Moscowitz is a lawyer and an accountant who has a Master’s degree in tax law.  
[
143] For approximately a year and a half, form 1973 to mid-1975, he practiced as a  
lawyer.  
[
144] He gained accounting experience between 1975 and 1985, and before he met  
David Smith, with the accounting firms Oppenheim, Pell Dixon & Company and Ernst &  
Young or Ernst & Whinney, in New York.  
[
145] His business relationship with David Smith started as a partnership in a company  
called David T. Smith Associates which was primarily a commercial real estate  
developer in Florida, carrying on its business in New York and New Jersey.  
[
146] In the mid 80s, Moscowitz moved to California and began working for the DT  
Smith group handling day-to-day operations related to construction projects in California  
as well as coordinating meetings with attorneys, accountants, and lenders and  
1
03  
maintaining books and records of the corporations .  
[
147] Moscowitz was executive Vice President and member of the board of each of the  
DT Smith corporations, but he never was a shareholder or a partner in those projects.  
Strassberg  
[
148] Strassberg is a Certified Public Accountant (“CPA”) licensed in the State of New-  
York since 1980 and, since 1987, a stockholder in the firm Rogoff & Company  
104  
“Rogoff”), an accounting firm established since 1946 .  
(
[
149] When he started at Rogoff, in 1980, he was involved on a part time basis in  
various real estate projects that Rogoff was auditing, like conversion of condominium  
properties and tax shelter projects. Then, Strassberg had also his solo practice as a  
101  
102  
103  
104  
David Smith, March 13, 2000, pages 15 to 17 and Ron Smith, June 10, 2008, pages 8 and 9  
David Smith, March 13, 2000, page 9  
Moscowitz, December 13, 1999, pages 18 to 25  
Strassberg, November 1, 2000 at page 104  
500-05-001686-946  
PAGE: 26  
CPA. The business of Rogoff evolved. In 1984, Strassberg became a full time employee  
and remained with this firm ever since.  
[
150] Strassberg met David Smith and Moscowitz in 1982 or 1983, while David Smith  
and Moscowitz were associated with a company called Berg Harmon Enterprises doing  
investments and establishing partnerships for the purposes of generating tax shelter  
and investing in shopping centers. Their professional relationship began: Strassberg  
rendered audit services to various entities.  
[
151] In 1986 or 1987, further to an internal revenue reform, the tax benefits from the  
tax shelters were eliminated for subsequent years. David Smith and Moscowitz moved  
to California where they started the DT Smith group, a home building company. Rogoff  
became the auditor of the group and Strassberg became the engagement partner.  
MC Lean & Kerr  
[
152] McLean & Kerr is a Toronto law firm which performed numerous services for  
Castor in the 80s and the early 90s.  
[
153] At the beginning, Harry Kerr was the partner in charge of Castor’s account but  
105  
Leonard Alksnis (“Alksnis”) took over during the 80s, before the 1987 to 1990 period .  
[
154] At the end of 1990 and thereafter, at the request of Alksnis, other lawyers of the  
firm were involved in the incorporation of various corporations and preparation of  
documents relating thereto: Harold James Blake (“Blake”), Christine Renaud  
(
“Renaud”) and Soo Kim Lee (“Lee”).  
Some Real estate properties financed by Castor  
Montreal Eaton Center  
[
155] The Montreal Eaton Center (“MEC”) represented one of the most significant  
development projects funded by Castor: the redevelopment of an existing retail complex  
in downtown Montréal, located on Ste.Catherine Street and known as “Les Terrasses”.  
105  
Alksnis, February 6, 2006, pages 11-12  
500-05-001686-946  
PAGE: 27  
[
156] MEC project consisted of four levels of retail space and a fifth level devoted to  
cinemas and a restaurant with an expansion onto adjacent land and a connection by  
underground tunnel to other retail shopping complexes - Place Montréal Trust to the  
1
06  
West, and Place Ville-Marie to the South - and to another Castor-financed property  
1
07  
known as the Palace Theatre .  
[
157] MEC project was commenced in February 1988, date of the first construction  
loan advance.  
[
158] Originally, “Les Terrasses” was owned by a predecessor company of YHDL.  
159] In the early 80s, an undivided interest in one half of the property was sold to  
[
9
7872 Canada Inc. (“97872”).  
[
160] Thereafter, it was owned in undivided co-ownership by York-Hannover  
Developments Ltd. (“YHDL”), except for a short period of 8 days during which it was  
sold by YHDL to a related entity, and 97872.  
1
08  
[
161] 97872 operated from Castor’s Montreal premises and the office of Dragonas .  
[
162] Much of the funding for the MEC project came from CHL which ranked in a  
subordinated position to a first mortgage position for a maximum amount of  
$
125,000,000 from third party lenders.  
[
163] CHL financed the project with 2nd mortgage security, more than one 3rd  
mortgage, also with equity loans made to the co-owners and, in the case of 97872, to its  
parent company, 612044 Ontario Limited (“612044”).  
109  
164] 612044 owned 100% of 97872. The main asset of 612044 was its investment  
110  
[
in common shares of 97872 . 612044’s investment in 97872 was financed by Castor,  
1
11  
with the loan equal to the amount of the investment .  
1
1
1
06  
07  
08  
PW-1108, pages 30 to 33.  
D-586 : Appraisal dated April 15, 1988 prepared by P.E. Bedard & Associes, p. 6  
For example: PW-1102-A-5, page 79 of a Loan Agreement with Bank of Montreal, used an address of  
Suite 335, 1320 Graham Boulevard for 97872 (PW-565-7C-1 uses this address for Dragonas  
Goulakos) with a copy to Castor. D-94 is a letter on 97872’s letterhead that uses Castor’s mailing  
address  
D-94  
109  
110  
111  
PW-566-1  
PW-1103-1  
500-05-001686-946  
PAGE: 28  
[
165] The ownership and corporate structure of MEC was as follows in the 1988 to  
112  
991 period .  
1
113  
166] Ultimately, there were ten Castor loans related to the MEC project , with a  
114  
[
further minor loan made to the MEC Tenants’ Association .  
Maple leaf Village  
[
167] Maple Leaf Village Investments Inc. (“MLVII”) owned the Maple Leaf Village  
“MLV”) a complex located in Niagara Falls which consisted of two major hotels (Fox  
Head Hotel and Brock Hotel), a motel (Village Inn Motel), a shopping complex, an  
(
1
15  
amusement park, museums and parking facilities .  
[
168] Commencing in or around 1979, a number of loans were made by CHL, and later  
by CHIF, to finance MLV, directly and indirectly.  
[
169] Until 1982, MLVII was 100% owned by Wost Development Corp. and York-  
Hannover Ltd, two corporations controlled by Stolzenberg and Wersebe who were  
1
16  
respectively President and Chairman of Castor .  
112  
113  
114  
115  
116  
PW-2941, volume 3, par. 3.18; see also PW-1100 A to C.  
CHL loans 1100, 1109, 1163, 1101 and 1103, 1145, 1042 1095 and 1146 and a CHIF loan  
Loan 1158  
PW-494  
Notwithstanding this relationship, no disclosure was made on the consolidated financial statements of  
Castor that the investments related to MLVII were related party transactions.  
500-05-001686-946 PAGE: 29  
[
170] In 1982, to finance the properties, a redevelopment plan and the restructuring of  
existing indebtedness, MLVll offered investment units consisting of subordinated  
1
17  
mortgage loans, preferred shares and common shares . The target amount for the  
new financing was $80.0 million.  
1
18  
[
171] Common shares of MLVII were sold to offshore entities , together with  
preferred shares and mortgage debentures, for approximately $60,000,000.  
•
•
•
This $60 million paid by companies in Panama, Curaçao and other secrecy  
jurisdictions was totally financed by loans provided by CHL and by CHIF.  
Certain loan documents were signed on behalf of the borrowers by individuals  
1
19  
closely related to Castor, namely Bänziger and Gambazzi .  
These offshore companies never paid any principal or interest on these loans  
from their inception in 1982 until the failure of Castor in 1992.  
[
172] By 1984, $63.2 million in mortgage loans, preferred shares and common shares  
120  
had been subscribed for .The $63.2 million of subscriptions remained unchanged  
thereafter.  
[
173] From 1988 to 1990, the total Castor loans associated with MLV increased from  
121  
96 million to $130 million , and they ranked after first and second mortgages totalling  
$
between $30 and $40 million.  
Toronto Skyline  
[
174] Located close to Lester B. Pearson Airport in Toronto, this commercial complex  
was comprised of a hotel of 715 units, a large number of convention and conference  
rooms, restaurants, recreational facilities, a retail mall, offices, extensive parking, and  
surplus land.1  
22  
[
175] Until 1981, the hotel was owned by York-Hannover Hotels Ltd. (“YHHL”) when it  
123  
was sold to Topven Holdings Ltd. (“Topven”) .  
1
17  
18  
PW-477  
1
Trade Retriever Corporation, Charbocean Trading, Runaldri S.A., Harling Finance Corporation, Harling  
International N.V. and Gebau Overseas  
1
1
1
19  
20  
21  
D-576, D-577, D-578, D-579, D-580: PW-2177  
PW-478: MLVll financial statements as at September 30,1984 and 1985, note 5  
CHL Loans 1011, 1012, 1013, 1014, 1015,1016, 1017, 1018, 1019, 1048, 1105, 1125, 1126 and 1136  
and CHIF loans 261000004, 385000004, 385000008, 3850053010, 3850090003, 3850093005,  
4
410033003, 4410040008, 4410043010, 7700010009, 8900000010  
122  
23  
PW-423  
1
PW-1083. Mullins Realty Limited appraisal dated May 1984, page 7.  
500-05-001686-946  
PAGE: 30  
[
176] In 1984, Lambert Securities Inc. (“Lambert”), a Panamanian company, acquired  
Topven.  
[
177] CHIF granted two loans to Lambert: a first loan of $27.5 million was advanced on  
1
24  
September 30, 1984 and a second loan of $6 million was advanced on October 15,  
1
25  
1
985 . The security given by Lambert to CHIF was a pledge of its own shares, the  
shares of its subsidiary, 594369 Ontario Inc. (“594369”) and the shares of Topven,  
126  
94639’s subsidiary . The security also included a pledge of Lambert’s note  
5
receivable from Skyeboat Investments Ltd. (“Skyeboat”), a part owner of the Calgary  
Skyline Hotel.  
[
178] Castor had serious issues with York-Hannover Hotel’s management of the hotel,  
127  
and with its loans to borrowers connected to the Toronto Skyline .  
[
179] At the beginning of January 1986, Castor sought limits to bank transfers to  
YHHL, seeking that all cash transfers to YHHL be pre-approved by Castor.  
1
28  
[
180] The audit report for Topven’s 1986 financial statements, dated May 15, 1987 ,  
was qualified due to differences of opinion as to the collectability of a receivable from  
1
29  
the hotel manager (YHHL), and the definition of related parties . These 1986 financial  
statements also contained a going concern note that highlighted three years of  
significant losses, outstanding 1985 and 1986 business and property taxes, and the  
1
30  
request by Topven’s bank that the company seeks alternate banking arrangements .  
[
181] In 1987, Castor’s loans to borrowers connected to the Toronto Skyline continued  
to accrue interest that was capitalized because of the Hotel’s inability to generate  
sufficient cash flow to meet its debt servicing costs.  
[
182] In 1988 the property was flipped from Topven to a subsidiary, Topven Holdings  
1988) Inc. (“Topven 88”). At the time of restructuring, Topven’s financial statements  
(
1
31  
disclosed an accumulated deficit of $29.97 million . Property taxes of $3 million,  
1
32  
including penalties , were in arrears for 1986 and 1987 and $1.3 million of 1988  
property taxes remained outstanding. The refinancing included arrangements with the  
City of Etobicoke to pay all 1986 and 1987 tax arrears by December 31, 1988.  
1
1
1
1
1
1
1
1
24  
25  
26  
27  
28  
29  
30  
31  
loan 576000/3002  
loan 576000/3009  
PW-1460-4 : Balance sheet of 594639 Ontario Limited dated August 31, 1988  
PW-1080-2.  
PW-187  
the auditors believed that there were additional undisclosed related parties : PW-187  
PW-187  
Exhibit PW-431 : Topven financial statements for the year ended December 31, 1987 disclosed a  
deficit of $29.97 million prior to the restructuring  
PW-211-26.  
132  
500-05-001686-946  
PAGE: 31  
[
183] During 1988, 1989 and 1990, there were two loans by CHL and three loans by  
CHIF which were ultimately secured by the Toronto Skyline.  
•
The two loans by CHL were a first mortgage to Topven 88 of approximately $40  
million and an operating line to Topven or Topven 88, which increased from $7.6  
1
33  
million as at December 31, 1988 to $26.4 million as at December 31, 1990 .  
•
The loans by CHIF consisted of a $20 million second mortgage loan to Topven  
8
8 and the two loans to Lambert made in 1984 which had increased to $35.7  
134  
million and $7.7 million respectively by December 31, 1988 .  
Toronto World Trade Center  
[
184] The Toronto World Trade Centre project (“TWTC”) consisted of two distinct  
elements: firstly, the office and commercial complex consisting of three office towers  
and secondly, the residential and condominium complex consisting of two residential  
condominium towers.  
[
185] The eight-acre site was located near the financial core of Toronto, adjacent to the  
Westin Harbour Castle, and served as a link between the Toronto Harbour area and the  
downtown financial area.  
[
186] The condominium project was completed in 1991 but the construction of the  
three office towers never took place.  
[187] The ownership structure was complex.  
[
188] The project was treated as a joint venture that was owned in the following  
proportions:  
Camrost Office Developments (Lakeshore) Limited (“Camrost”) 50.000%  
7
52608 Ontario Limited (“752608”)  
12.500%  
18.375%  
19.125%  
Toronto World Trade Centre Limited Partnership (“TWTCLP”)  
Toronto World Trade Centre Inc. (“TWTCI”)  
[
189] TWTCI was owned 49% by Toronto Waterfront Development Corp. (“TWDC”)  
and 51% by York-Hannover Developments Ltd. (“YHDL”). In addition to its own interest  
in the project, TWTCI also had a 56.8% interest in TWTCLP and, through that interest,  
1
33  
34  
CHL loan 1107, GL/AC 066 (operating line) and loan 1148  
1
CHIF loan 888,002/20.03, loan 576000/3002 and loan 576001/3009  
500-05-001686-946  
PAGE: 32  
acquired an additional 10.437% (56.8% of 18.375%) of the project. By virtue of its own  
1
9.125% direct ownership in the project and its 10.437% indirect ownership, TWTCI had  
a total interest in the project representing 29.562% of the overall project.  
135  
190] CHL made four different loans related to this project .  
[
•
•
•
Separate loans to the two owners of TWTCI, Toronto Waterfront Development  
Corp. and YHDL, that were primarily secured by a pledge of common shares of  
the TWTCI;  
A loan directly to the TWTCI, which was primarily secured by a pledge of the  
TWTC’s 19.125% beneficial interest in the project as well as a pledge of its  
56.8% ownership of the TWTCLP;  
A loan made to YHDL, which was secured by an assignment of options to  
acquire 50% of the 12.5% interest in the project held by 752608 Ontario Inc. as  
well as 76% of the outstanding units of the Skyline Triumph Limited Partnership.  
[
191] CHL’s loans associated with the TWTC increased from $17,589,922, at January  
, 1986, to $84,910,000 at December 31, 1990.  
1
[
192] However, during that period, none of the increases in the loans were used to  
actually finance the project.  
[
193] The increases in the loans were due to year end reallocations of interest on  
York-Hannover loans that had been capitalized in account 046 or that was reallocated  
by circular cash management of funds.  
[
194] CHL did not have a direct charge against the project but merely an assignment of  
the shares of TWTCI (its interest in the overall project being 29.562%) and ownership of  
units in TWTCLP (equivalent to 7,938% of the overall project).  
[
195] Castor ownership of units in TWTCLP resulted from:  
•
Five units of the 213 units (2.35%) of TWTCPL, acquired by CHL in 1988. These  
units represented a 0.432% (2.35% of 18.375%) interest in the project;  
•
In 1989, CHL acquired a further 7.506% (40.85% of 18.375%) interest in the  
TWTC project: 607670 Ontario Inc., a wholly-owned subsidiary of CHL, acquired  
all the shares of 696604 Ontario Ltd. who itself owned 87 of the 213 (40.85%)  
units of the TWTCPL.  
135  
Loans 1046, 1067, 1120 or 1149 and 1090  
500-05-001686-946  
PAGE: 33  
Calgary Skyline Hotel  
[
196] The Calgary Skyline Hotel (“CSH” or “Calgary Skyline”) is a 23 storey hotel of  
136  
87 rooms located in downtown Calgary, Alberta . It is directly connected to the  
3
Calgary Convention Centre and to the Glenbow Museum, the Calgary Centre for the  
1
37  
Performing Arts and the Canadian Pacific's Palliser Square office tower .  
138  
197] CHL became involved in 1982 when it purchased a $15.7 million mortgage  
139  
:
[
from YHDL and Robert Lee Ltd., a shareholder of Castor  
•
this mortgage was to Skyeboat Investments Limited (“Skyeboat”), the 100%  
owner of the Skyline Calgary; and  
•
the owner of Skyeboat was Kevin Hsu, who also owned Topven Holdings Ltd.  
[
198] In 1983-84, the Skyline Calgary mortgage loan became part of the refinancing of  
140  
the Toronto Skyline Hotel .  
[
199] The hotel was managed through a management agreement by the Four Seasons  
Hotel Group.  
[
200] In June 1985, 321351 Alberta Ltd. (“321351”) purchased from Four Seasons  
Hotel Ltd. its interest in the hotel lease and the hotel’s furniture, fixtures and equipment.  
1
41  
CHL provided $6 million in financing to 321351 for the transaction and Four Seasons  
Hotel Ltd. took a Vendor Take Back mortgage (“VTB”) guaranteed by CHL for an  
additional $3.6 million.  
[
201] In the same month, Kevin Hsu abandoned his ownership position in Topven and  
Skyeboat, and the shares of Skyeboat were transferred to Lakeland Inc. (“Lakeland”).  
The shares of Skyeboat were pledged as security for the CHL loan to Skyeboat.  
[
202] In June 1986, an additional loan of $10.5 million was made by CHL to Skyeboat  
142  
to repay a second mortgage loan from Robert Lee Ltd.  
[
203] During 1986, CHL also advanced additional funds to pay Morguard Trust, the  
holder of the first mortgage on the hotel.  
1
1
1
1
1
36  
37  
38  
39  
40  
PW-469  
D-140  
PW-1053-48, seq. p. 186  
PW-1053-49, seq. p. 279  
as outlined in a handwritten memorandum in the 1983 working paper file as working papers E143 to  
E143M (PW-153-45 seq. pp. 291 to 300  
141  
42  
E153, PW-1053-38, seq. p. 154  
1
E135, PW-1053-35 seq. p. 154  
500-05-001686-946  
PAGE: 34  
[
204] At December 31, 1986, loans totalling $36.1 million were owed to CHL and, in  
addition, CHL was guaranteeing the VTB with Four Seasons Hotel Ltd. for $3.6 million.  
[
205] In 1987, CHL loaned $6.7 million to Skyeboat to be used to repay the first  
mortgage on the hotel to Morguard Trust. In addition, the capitalization to the loan  
balances of interest and fees in the amount of $5 million, and other payments of $1.5  
million raised the total amount of CHL’s loans to the project to $49.3 million.  
[
206] By the end of 1987, the total amount of other secured indebtedness on the  
project was $4.4 million (of which $3.6 million was guaranteed by CHL), giving a total  
project indebtedness of $53.7 million.  
[
207] The common shares of Skyeboat were owned by Lakeland and the Class B  
143  
Special shares were held by Lambert Securities (“Lambert”) . According to the  
1
44  
testimony of Gaston Baudet on May 11, 1998 , Lakeland and Lambert were owned by  
Wersebe and the owner of 321351 was 326902 which was held in trust by Granton  
1
45  
Patrick and also owned by Wersebe .  
[
208] In February 1988, there was a corporate restructuring and refinancing of the  
Calgary Skyline project. The property was “flipped” from Skyeboat and 321351 to a new  
company, Skyview Hotels Limited (“Skyview”), with Skyeboat taking back a 70%  
ownership interest in the new company and 321351 taking a 30% ownership interest.  
[
209] As part of the restructuring, CHL and CHIF provided first and second mortgages  
for $25 million and $16 million respectively, and other material loans were secured by  
pledges of shares.  
[
210] By the end of 1988, Castor’s exposure had increased to $59.4 million, including  
146  
the $3.6 million guarantee to Four Seasons Ltd. , mainly due to the capitalization of  
interest on the loans arising from the restructuring.  
[
211] Castor’s exposure on this project continued to increase in 1989 and 1990 due to  
the capitalization of unpaid interest and fees, and the financing in 1990 of the borrower’s  
repayment of the $3.6 million debt to Four Seasons Ltd.  
Ottawa Skyline Hotel  
[
212] The Ottawa Skyline Hotel (“OSH”) was a 26 storey hotel of 450 rooms located in  
147  
downtown Ottawa, only two blocks from Canada's Parliament Building . The hotel land  
and building was held by The Royal Trust Company as Trustee, on behalf of Campeau  
143  
144  
145  
146  
147  
PW-1086-12  
PW-1199 : Rogatory commission of Gaston Baudet, May 11, 1998, response to Questions 6b and 16  
PW-1086-3 : Letter dated October 9, 1986 from Coopers & Patrick to Castor  
CHL loans 1097, 1143, 1147 and GL 408/1154 and CHIF loan 790002/2005 (ou 790002/2995)  
D-140  
500-05-001686-946  
PAGE: 35  
Corporation, the beneficial owner. Constructed in 1967, the hotel’s operation was  
always leased to third parties.  
[
213] The York-Hannover group of companies became involved with the Skyline  
Ottawa in early 80s through York-Hannover Hotels Ltd (“YHHL”), when YHHL acquired  
a leasehold interest under the terms of a 1967 lease agreement that terminated in 1987,  
1
48  
subject to two 10-year renewal options .  
[
214] In 1984, YHHL sold its interest in the lease, furniture, fixtures and equipment to  
its affiliate Skyline Hotels (1980) Ltd. (“Skyline 80”).  
[
215] At December 31, 1987, the loan from CHL was in the amount of $10.494 million.  
216] At December 31, 1989, the loan balances to the Skyline Ottawa project had  
[
1
49  
increased by $4 million to $14.494 million .  
[
217] In March 1990, 687292 Ontario Ltd. (“687292”) purchased from Skyline 80 all the  
assets related to the operations of the Skyline Ottawa Hotel for $1 and assumed the  
1
50  
debt related to the Ottawa Skyline .  
DT Smith projects  
[
218] The DT Smith Group comprised nine construction projects and eight projects for  
which the land was being held for development or resale.  
[
219] The construction projects were as follows:  
•
•
•
•
•
•
Laguna I (David George Ventures, Inc.)151  
Laguna II (D.T. Smith Ventures, Inc.)152  
San Marcos -The Fairways (D.T. Smith Development, Inc.)153  
Wood Ranch I -The Greens (David George Companies, Inc.)  
Wood Ranch II – Village on the greens (D.T. Smith Homes, Inc.)154  
Dove Canyon I –Belvedere (David Smith Industries, Inc.)155  
1
48  
PW-462: Appraisal dated March 1, 1987 by A.H. Fitzsimmons & Co. Ltd., pp. 2 to 5; and D-44  
Appraisal dated July 22, 1987 by Ron Juteau &Associates Ltd., pp. 7 and 8.  
149  
150  
151  
152  
153  
154  
Loans 1049 and 1152  
PW-1096-2  
Compendium PW-1125  
Compendium PW-1116  
Compendium PW-1117  
Compendium PW-1118  
500-05-001686-946  
PAGE: 36  
•
•
•
Dove Canyon II -Club Vista (David Smith Industries, Inc.)156  
Chino Hills - Gordon Ranch/ Galloping Hills (D.T. Smith Industries, Inc.)157  
Tennis Court Villas at Monarch Beach (D.T. Smith Enterprises, Inc.)158  
[
220] The land development projects were as follows:  
•
•
•
•
•
•
•
•
Bonanza Homes (David George Ventures, Inc.)159  
Circle "R" Ranch (D.T. Smith Circle R, Ltd.)160  
Rancho California (D.T. Smith Communities, Ltd.)161  
Rancho Parcel 2 (D.T. Smith Rancho Parcel 2, Ltd.)162  
Rancho Parcel 5 (D. T. Smith Rancho Parcel 5, Ltd.)163  
Ritz Pointe (D.T. Smith Equities, Ltd.)164  
Santiago Ranch (D.T. Smith Properties, Inc.)  
Walker Basin (D.T. Smith Securities, Ltd.)165  
[
221] Laguna I project was part of the master-planned community of Niguel Ranch,  
adjacent to DT Smith's Laguna II (Vista Monte) project located in Orange County,  
California, mid-way between Los Angeles and San Diego.  
[
222] The Laguna II (Vista Monte) project consisted of 111 family homes on 25.4 acres  
of land within the master-planned community of Niguel Ranch in Orange County. The  
project was commenced in 1987 and upgraded in December 1988. The lots had good  
views onto the ocean.  
155  
156  
157  
158  
159  
160  
161  
162  
163  
164  
165  
Compendium PW-1115  
Compendium PW-1114  
Compendium PW-1119  
Compendium PW-1125  
D-1123  
Compendium PW-1123  
Compendium PW-1120  
Compendium PW-1121  
Compendium PW-1122  
Compendium PW-1124  
Compendium PW-1125  
500-05-001686-946  
PAGE: 37  
[
223] The San Marcos (The Fairways) project consisted of 128 family homes on 28.9  
acres of land within the master-planned residential and golf course community of Lake  
San Marcos in San Diego County. The project was commenced in 1987 and upgraded  
in December 1988.  
[
224] The Wood Ranch I (The greens) project in Simi Valley, Ventura County,  
successfully closed at profit in 1989 and Castor's loan was subsequently fully repaid.  
There were no loans outstanding and no cash balances on hand at December 31, 1990.  
[
225] The Wood Ranch II (Village on the Green) project consisted of 156 residential  
townhouses and condominium units on 12.6 acres of land within the master-planned  
residential and golf course community of Wood Ranch in the Simi Valley area of  
Ventura County. The project was commenced in 1988.  
[
226] The Dove Canyon 1 (Belvedere) project consisted of 116 single family homes on  
1.7 acres of land within the master-planned residential and golf course community of  
Dove Canyon in Southern Orange County. The project was commenced in 1988.  
2
[
227] The Dove Canyon II (Club Vista) project consisted of 106 single family homes on  
9.2 acres of land within the master-planned residential and golf course community of  
Dove Canyon in Southern Orange County. The project was commenced in 1988.  
1
[
228] The Chino Hills (Gordon Ranch/Galloping Hills) project consisted of 136 single  
family homes on 45.5 acres of land within the master-planned residential and golf  
course community of Gordon Ranch in San Bernardino County. The project was  
commenced in 1988.  
[
229] The Tennis Court Villas at Monarch Beach project closed at profit in 1990 and  
Castor's loan was fully repaid. The units were located across the street from Ritz Pointe.  
[
230] The Bonanza project consisted of 13.7 acres of land located in La Puente, Los  
Angeles County. The plan was to develop the property into 78 residential townhouses.  
[
231] The Circle “R” Ranch project consisted of approximately 54 acres of land within  
the Circle R Ranch Golf Course in Escondido, San Diego County. The property was to  
be developed into 212 detached single family homes within a residential and golf course  
community.  
[
232] The Rancho California project consisted of 57 acres of land subdivided into five  
separate but contiguous parcels totalling approximately 533 residential lots which were  
to be developed into a master-planned residential and golf course community within a  
project known as Winchester Mesa. Winchester Mesa was to form part of the master-  
planned community known as Rancho California in Riverside County.  
500-05-001686-946  
PAGE: 38  
[
233] The Rancho Parcel II project consisted of 46 acres of land within the Murietta Hot  
Springs Golf Course in Rancho California, Riverside County and a master-planned  
community known as Rancho California. DT Smith purchased this land in 1989.  
[
234] The Rancho Parcel V project (Eagle Estates) consisted of 36.2 acres of land  
located within the Murietta Hot Springs Golf Course in Rancho California, Riverside  
County and within a master-planned community known as Rancho California. DT Smith  
purchased this land in 1989.  
[
235] The Ritz Pointe project, located in Dana Point, Orange County, consisted of 15.9  
acres of land to be developed into 191 oceanfront residential townhouses and  
condominium units adjacent to the Monarch Bay Golf Course. The project was adjacent  
to the Tennis Court Villas project and was to be an integral part of the Laguna Niguel  
master-planned community of 550 acres, designed to hold 3,400 residential units, a golf  
course and a resort hotel. DT Smith acquired the property in 1989.  
[
236] The Santiago Ranch project, located in El Toro Foothills, Orange County,  
consisted of 120 acres of land to be developed into 162 units. The master-planned  
community had been approved for a total of 2,200 dwellings. It was located quite close  
to Dove Canyon, on a ridge with unobstructed views of the canyons and the Anaheim  
hills, and within commuting distance to Los Angeles.  
[
237] The Walker Basin project, located in Rancho California, Riverside County,  
consisted of an option to acquire land from Johnson & Johnson for the development of  
31 lots. The land acquisition was to take place in 1991 and would have involved an  
6
additional outlay of $19.2 million.  
Other properties  
Meadowlark  
[
238] Meadowlark was a shopping center located in Edmonton Alberta, approximately  
one mile from the West Edmonton Mall.  
[
[
239] Castor’s involvement in the project dated back to the early 80s.  
240] From September 1985 onwards, 50% of Meadowlark was owned by Leeds, a  
wholly owned subsidiary of YHDL, and 50% by Raulino Canada.  
1
66  
[
241] During 1988, 1989 and 1990, Castor had 2 loans secured by this project in the  
Montreal portfolio of loans, which ranked behind a $15 to $16 million first mortgage held  
1
67  
by BMO .  
166  
Loans # 1030 and # 1117  
500-05-001686-946  
PAGE: 39  
Hazelton Lanes  
[
242] Hazelton Lanes was a luxury retail and residential development in Toronto's  
Yorkville area comprised of two sites.  
[
243] YHDL and Confederation Life held 50% undivided interest in the property.  
244] YHDL held its undivided 50% interest in the first site of the property through two  
[
wholly owned subsidiaries, 650188 Ontario Limited and 650189 Ontario Limited and its  
5
0% interest in this second site through Hazelton Lanes Developments Ltd. 168  
Toronto Skyline Triumph  
[
245] The Toronto Skyline Triumph (“The Triumph”) was a 10-storey hotel of 380  
169  
rooms located on Keele Street, City of North York in Metropolitan Toronto, Ontario .  
Th e issu es an d t h e t ask  
The issues and their components  
[246] There are 5 issues: negligence, reliance, liability, damages and costs.  
[
247] The negligence issue involves three components: the audited financial  
statements, the valuation letters and the certificates for Legal for Life Opinions.  
[
248] The reliance issue involves deciding if there is a causal connection between  
negligence issue findings and Widdrington’s investment decisions.  
[
249] The liability issue, assessing whether C&L shall be held liable for damages  
allegedly sustained by Widdrington, necessitates determining the applicable law and its  
content and, thereafter, its application to the specific facts of the Widdrington file (i.e.  
the findings on negligence, damages and reliance).  
[
250] The damages issue involves three components: Widdrington investment of 1989,  
Widdrington’s investment of 1991 and Widdrington’s claim for reimbursement of the  
1
67  
PW-1112A, PW-1112B, PW-1112C: Charts prepared by R. Smith showing the ownership structure of  
the project and the indebtedness at year-ends 1988, 1989 and 1990.  
PW-1059-2, PW-1059-6, PW-1059-8 and PW-1059-11; PW-1059-6A  
D-200  
168  
69  
1
500-05-001686-946  
PAGE: 40  
amount he paid to settle the claim against him further to the declaration of dividends  
and Castor’s bankruptcy.  
[
251] The issue of costs involves discussing the costs of the first and of the second  
trial and ruling on the liability for such costs.  
The task  
[
252] The Court’s primary role is to seek the truth and resolve debates by considering  
both the expert and the lay evidence.  
[
253] Faced with competing theories, the Court cannot simply view contradictory  
evidence as the end of the debate – she must reach a conclusion.  
[
[
254] In the present case, burden of proof rests on the Plaintiff.  
255] In order for the Plaintiff to be successful, Plaintiff must prove its case on a  
balance of probabilities: this is not controversial. To meet the balance of probabilities,  
1
70  
evidence must show that the events «more likely than not» occurred in the manner  
presented by Plaintiff.  
Th e n egligen ce issu e  
General considerations  
[
256] Looking at the negligence issue in a professional liability case calls for the  
following particular considerations which apply equally in civil law and common law:  
•
•
•
•
Difference between negligence and error of judgment;  
Importance of the professional standards;  
Solution where there are different schools of thought;  
Warning against hindsight and today’s professional standards.  
[
257] Looking at the negligence issue of an auditor’s professional liability case calls for  
additional particular considerations which also apply equally in civil law and common  
law:  
170  
F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41, para.49, AZ-50514295  
500-05-001686-946  
PAGE: 41  
•
Knowledge of the respective role of management and auditor.  
Difference between negligence and error of judgment  
[
258] Professionals are liable for damages caused by their negligent conduct when  
such conduct has fallen below the applicable standard of care. They are not liable for  
1
71  
simple errors of judgment .  
259] Not every decision made is motivated by professional judgment. When it is, the  
[
Court must always consider whether the professional involved exercised his judgment  
1
72  
honestly and intelligently .  
[
260] It is not defensible to characterize negligence as being part of professional  
judgment in the hope of escaping liability.  
[
261] A professional’s work, as an auditor’s work, is generally judged on the standard  
of «whether it can be said that a reasonable professional in the position of the person  
accused of misconduct [would or] would not have acted as the person in question  
1
73  
did» . Even if the liability of a professional is generally determined by comparing his or  
her conduct to the conduct of a reasonable professional placed in similar  
circumstances, based on common professional practice, no professional can exonerate  
oneself from liability if the common “practice is not in accordance with the general  
1
74  
standards of liability, i.e., that one must act in a reasonable manner” .  
[
262] Indeed, negligence in the case of a professional cannot be assumed simply  
because the expected result has not been attained.  
Importance of the professional standards  
[
263] It is generally accepted that when a professional acts in accordance with a  
recognized and respectable practice of his or her profession, he or she is not found to  
1
75  
be negligent .  
[
264] In the case of auditor’s liability, the standards involved are detailed and codified  
in the CICA Handbook, standards which are adopted by the profession following  
rigorous and thorough procedures. Such detailed and thorough standards are therefore  
entitled to great deference by the courts.  
1
1
1
1
71  
72  
73  
74  
Guardian Insurance Co. v. Sharp, [1941] S.C.R. 164  
Barrington v. The Institute of Chartered Accountants of Ontario, [2010] ONSC 338, at para. 158.  
Council for Licensed Practical Nurses v. Walsh, [2010] NLCA 11 (CanLII) at para. 54; AZ-50610050.  
Roberge c. Bolduc, [1991] 1 R.C.S. 374, 1991 CanLii 83 (S.C.C.) at page 79; AZ-91111033; J.E. 91-  
4
12  
175  
Ter Neuzen v. Korn, [1995] 3 S.C.R. 674, at page 695; AZ-95111103; J.E. 95-1970  
500-05-001686-946  
PAGE: 42  
[
265] In rare instances, a Court may declare a standard negligent in itself when, for  
example, such standard is “fraught with such obvious risks” and so contrary to common  
sense that anyone would be capable of finding it negligent.  
Solution where there are different schools of thought  
[
266] It is not the Court’s role to choose between two accepted schools of thought  
within a given profession.  
[
267] While experts can shed light on a profession’s given standards, and therefore  
help the court determine whether or not a professional has complied with those  
standards, the Court cannot condemn a professional that has favoured one method or  
one interpretation of a standard over another when both are accepted professional  
1
76  
standards .  
[
268] The Handbook, like the Civil Code of Québec, is principle based and it is  
possible that there may be more than one reasonable school of thought within the  
profession with respect to the application of the Handbook in a particular circumstance.  
However, in order to be recognized, a school of thought must have a reasonable basis  
1
77  
and cannot, for example, be an “opinion held by one person” .  
Warning against hindsight and today’s professional  
standards  
[
269] The Court should be wary not to use hindsight and cautious not to evaluate past  
conduct with later standards.  
[
270] Professional negligence often involves standards which are prone to evolve,  
such as GAAP and GAAS. As such, it is important to use the standards that existed at  
1
78  
the time, in 1988, 1989 and 1990, not the ones that were applicable thereafter .  
Respective role of management and auditor  
[
271] The auditor does not prepare the financial statements which are the  
responsibility of management.  
176  
177  
178  
Lapointe v. Hôpital le Gardeur, [1992] 1 S.C.R. 351; AZ-92111029; J.E. 92-302; Ter Neuzen v. Korn,  
[
1995] 3 S.C.R. 674; AZ-95111103; J.E. 95-1970; 285614 Alberta Ltd. v. Burnet, Duckworth &  
Palmer, [1993] A.J. No. 157; p. 382  
See, for example, Litchfield v. College of Physicians and Surgeons of Alberta, [2007] ABQB 584  
(
CanLII), aff’d by the Court of Appeal, Litchfield v. College of Physicians and Surgeons of Alberta,  
[
2008] ABCA 164 (CanLII).  
Ter Neuzen v. Korn, [1995] 3 S.C.R. 674, at page 693; AZ-95111103; J.E. 95-1970.  
500-05-001686-946  
PAGE: 43  
[
272] Management is responsible for the accurate recording of transactions and the  
1
79  
preparation of financial statements in accordance with GAAP . An audit does not  
1
80  
relieve management of its responsibilities .  
[
273] The auditor conducts an examination of the books and affairs of the company  
according to the standards of his profession, known as generally accepted accounting  
standards (“GAAS”).  
[
274] The objective of an audit of financial statements is to express an opinion on the  
fairness with which they present the financial position, results of operation and changes  
in financial position in accordance with generally accepted accounting principles or, in  
special circumstances, another appropriate disclosed basis of accounting, consistently  
1
81  
applied .  
[
275] The auditor seeks reasonable assurance that the financial statements, taken as  
a whole, are not materially misstated. He normally designs his auditing procedures on  
1
82  
the assumption of management’s good faith . The auditor is a watchdog, not a  
1
83  
bloodhound .  
[
276] The auditor is not a guarantor of the financial statements issued by  
1
84  
management .  
[
277] Since Castor was incorporated under the New Brunswick Business Corporations  
1
85  
Act , and C&L appointed as auditor by the shareholders, various sections of this Act  
namely sections 100 to 112) are relevant.  
(
•
•
The directors must place comparative financial statements, prepared in  
186  
accordance with GAAP before the shareholders at every annual meeting and  
when the shareholders have chosen to appoint an auditor, the statements must  
1
87  
be accompanied by the auditor’s report ;  
The auditor must be independent of the directors and officers of the  
1
88  
corporation ;  
1
1
1
1
1
79  
PW-1419-1A, 5000.02 (1988); PW-1419-2A, 5000.02 (1989) and PW-1419-3A, 5000.02 (1990)  
PW-1419-1A, 5000.02 (1988); PW-1419-2A, 5000.02 (1989) and PW-1419-3A, 5000.02 (1990)  
PW-1419-1A, 5000.01 (1988); PW-1419-2A, 5000.01 (1989) and PW-1419-3A, 5000.01 (1990)  
PW-1419-1A, 5000.04 (1988); PW-1419-2A, 5000.04 (1989) and PW-1419-3A, 5000.04 (1990)  
Guardian Ins. Co. v. Sharp, [1941] S.C.R. 164, p.169-170; In Re London General Bank (no.2), [1895]  
Ch. 673; In Re Kingston Cotton Mill Co. (no.2),[1896] 2 Ch. 279; R.M.A. Restaurant Management Ltd v.  
Gallay, J.E. 96-586 (S.C.); Sarraf v. Awad,J.E. 95-1881 (S.C.)  
80  
81  
82  
83  
2
184  
PW-1419-1A, 5000.01 and 5000.04 (1988); PW-1419-2A, 5000.01 and 5000.04 (1989) and PW-1419-  
3
A, 5000.01 and 5000.04 (1990)  
185  
186  
187  
188  
BCA, S.N.B. 1981, c. B-9.1., PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., sections 100(1) and 100(3); PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., section 104(1); PW-2312-1  
500-05-001686-946  
PAGE: 44  
•
•
•
The auditor is obligated to “make the examination that is, in his opinion,  
189  
necessary to enable him to report on the financial statements required (…)” -  
i.e., as to whether, in his opinion, the financial statements prepared by the  
management of the company and presented at the annual assembly represent  
fairly the financial situation of the company in accordance with generally  
accepted accounting principles (“GAAP”);  
The present and former directors, officers, employees and agents are required  
«
upon the demand of an auditor» to furnish the auditor with «information and  
explanations» and «access to records, documents, books, accounts and  
vouchers of the corporation or its subsidiaries» that in the auditor’s opinion are  
necessary to make such an examination, as they are reasonably able to  
1
90  
furnish ;  
The directors are further required, «upon the demand of an auditor» to obtain  
such information and explanations from the present and former directors,  
1
91  
officers, employees and agents of the corporation on the auditor’s behalf ;  
•
•
The directors must approve the financial statements in order for the corporation  
1
92  
to issue, publish and circulate them ; and  
The directors are entitled to rely on the auditor that such financial statements  
fairly reflect the financial condition of the corporation, as they are not liable for  
various decisions made when they reasonably rely on a report from the  
1
93  
company’s auditors .  
Books and records  
[
278] Defendants assert that there are issues of integrity of books and records  
available to the Court: Castor’s books and records and YH’s books and records.  
Castor’s books and records  
[
279] Defendants’ experts Donald Selman (“Selman”), Russell Goodman  
“Goodman”) and Phillip Levi (“Levi”) assert that there is an issue of integrity of the  
books and records of Castor.  
(
[
280] Selman writes:  
189  
190  
191  
192  
193  
BCA, S.N.B. 1981, c. B-9.1.,section 110(i); PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., section 111(1); PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1.,section 111(2); PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., section 102(2); PW-2312-1  
BCA, S.N.B. 1981, c. B-9.1., section 80(3); PW-2312-1  
500-05-001686-946  
PAGE: 45  
"
It is unsafe to assume that the Castor documents that are presently before the  
194  
"
Court were available to be seen by the auditors in anything like their entirety.  
[
[
281] Goodman writes:  
"
I'm not satisfied that the complete Lambert Securities loan files in safekeeping  
195  
contents were preserved and made available to the Court and to the parties ."  
282] Levi writes:  
"
It is important to consider whether what everyone is looking at today represents  
what Coopers & Lybrand had available to examine during their audits in 1988,  
196  
1
989 and 1990.  
"
[
283] It is true that:  
•
During the spring of 1992, records of the overseas subsidiaries kept in Montreal,  
197  
Zug and Schaan were shipped to their respective jurisdictions - the accounting  
records kept in Zug were shipped to Castor’s Zurich office, while the non-  
accounting records kept in Schaan were removed by Gross and taken to his  
garage (for a period of 2 to 3 weeks) from where they were packed and shipped,  
1
98  
together with the accounting records, to the various jurisdictions .  
•
On July 9, 1992, Castor’s trustee in bankruptcy Bernard Gourdeau (“Gourdeau”)  
took possession of Castor’s offices located in Montreal and ascertained the state  
and condition of the premises - some documents were shredded, some filing  
1
99  
cabinets and file folders were empty - all evidenced by video .  
•
•
The trustee did not take possession of the offices located in Toronto, Calgary and  
2
00  
New York City and the records that were located therewith were only obtained  
2
01  
from the landlords of such premises after July 9, 1992.  
During the period that the records of the subsidiaries were in the hands of the  
foreign trustees and/or official liquidators, the Trustee did not ask for detailed and  
complete inventories of the records found in their possession and did not put into  
place any control measures to ensure that the integrity of the records would not  
2
02  
be compromised .  
194  
195  
196  
197  
198  
199  
200  
201  
202  
D-1295, at page 376  
D-1312, at page 500  
D-1347, at page 8  
D-941; Gross October 4, 1999 p. 375-390  
Gross October 4, 1999 p.375-390  
Video produced as D-644 & D-941 Memorandum dated July 10, 1992, prepared by Gourdeau  
Gourdeau February 18, 2008, p. 273  
Gourdeau February 18, 2008, p. 273-276  
Gourdeau February 19, 2008, p. 5, 58-59, 70-71, 74-76, 104, 106-107, 111, 129-130  
500-05-001686-946  
PAGE: 46  
•
in December 1992, the Trustee authorized the release of all records and  
documents in the possession of Trust Management and Finance (“TMF”), relating  
to Castor, CH International (Netherlands) BV, Castor Finanz AG and Castor  
Investment AG, to Gambazzi’s attorneys for the purpose of finalizing the  
companies’ 1991 year end books, financial statements and corporate filings, but  
2
03  
no inventory was kept of what was released .  
•
•
Records relating to transactions between Castor and Trinity stored in a  
warehouse in Connecticut or Vermont were not retrieved by the Trustee (even  
though he consulted and reviewed such records without making an inventory)  
2
04  
and such records were subsequently destroyed .  
Gourdeau testified that he collected documents from other sources, such as YH  
documents from BDO and Whiting, and documents from Dragonas, commingled  
them with the Castor records he found on premises, and that he is unable today  
to determine which of the documents now in his possession came from Castor’s  
2
05  
records and which came from other sources .  
•
•
Rancourt testified that there were a few loan ledger cards that she worked with  
that were no longer in the Castor records she was shown in preparation for  
2
06  
trial .  
When Gourdeau retrieved documents (paper copies) a few years after they were  
scanned to allow computerized consultation, he had to reorganize them and was  
2
07  
no longer able to reconstruct their previous state .  
[
284] Nevertheless, the nature and types of documents that were kept by Castor in  
Montreal up to July 1992 and the nature and types of documents that were kept by the  
overseas subsidiaries have been established.  
[
285] Five lay witnesses employed by CHL testified (Tooke, Rancourt, Simon, MacKay  
and Ron Smith). All of them, whether called by Plaintiff or Defendants, affirmed that the  
Canadian books and records that they reviewed in order to testify were accurate  
concerning what existed at the time that they were employed at Castor.  
[
286] Regarding the Canadian books and records, the evidence of Tooke and  
Rancourt clearly demonstrate that the books of original entry that they reviewed for  
2
03  
PW-2391-5 and Gourdeau, February. 19, 2008, pp. 58-61 and 142- 146; PW-2391-2 and Gourdeau  
January 14, 2008 p. 98-104 and p. 135-140; PW-2393-1; Gourdeau, February 19, 2008, p. 142-143  
Gourdeau, February 18, 2008, p. 277-279  
2
04  
05  
2
Gourdeau, January 14, 2008 p. 96-97, 144; Gourdeau, January 30, 2008, p. 76-77; Gourdeau,  
February 19, 2008, p. 214-217: Gourdeau, February 22, 2008, p. 61-63;  
Rancourt, February. 29, 2008, p. 164-165 and 176-179 and PW- 167A-1  
Gourdeau, February. 19, 2008, pp. 191-192 and 202- 217  
2
06  
07  
2
500-05-001686-946 PAGE: 47  
purposes of this trial were the same books and records that existed and were made  
2
08  
available to C&L for purposes of their audits .  
[
287] Insofar as the books and records of the off-shore subsidiaries are concerned, the  
209  
strengthened the Court’s  
exhaustive correlation exercise performed by Vance  
conclusion that the records referred to by C&L in their audit working papers (“AWPs”)  
are the same records that are in evidence before her.  
[
288] There is absolutely no evidence to suggest that documentation was requested by  
C&L and suppressed by Castor.  
[
289] Gourdeau explained the source of the records, the manner in which they were  
stored (and shared with C&L) and the unprecedented efforts made by the Trustee to  
2
10  
compile a virtually complete set of documents .  
[
290] There is no credible evidence that the Castor documents that were shown to the  
auditors for the audits, and that are in the possession and control of the Trustee, are  
unreliable.  
[
291] None of the audit staff members ever testified that a document that they relied  
upon for their audit no longer exists. The sole exception is the case of the alleged  
2
11  
Lambert financial statements referred to by Ford during her testimonies , statements  
that are not at all mentioned in her working papers. Given the circumstances  
surrounding the work performed by Ford in relation to the Lambert loans during the  
2
12  
and taking account of reasons later enunciated in the present  
relevant years  
2
13  
judgment in relation to Ford’s credibility and reliability , the Court grants no weight to  
Ford’s testimony that she would have seen Lambert financial statements.  
[
292] During the trial, in examination in chief, Levi opined that because certain  
appraisals which were referenced in the AWPs do not correspond with the dates or the  
authorship of appraisals filed in the court record, this would be evidence that documents  
2
14  
are either unreliable or have been suppressed .  
[
293] Levi went on to state that «there are other examples in other years where  
auditors had marked down names of appraisal companies and the appraisals can’t be  
2
2
2
2
08  
09  
10  
11  
Tooke, February 27, 2008, pp. 62-63; Rancourt, February 29, 2008, pp. 164-165.  
Vance, March 5, 2008, pp. 77-79; PW-1484. See for example PW-1484-5-1.  
See, for example, Gourdeau, January 14, 2008, pp. 67-73, 93-98, 101-104, 135-143.  
Ford, November 9, 1995, pp. 41-44; Ford, November 14, 1995, pp. 67,73,81,83to85, 152; Ford,  
September 5, 1996, pp. 123; Ford, December 7, 2009, pp 171-174.; Ford, December 11, 2009, pp.66  
and followings.  
212  
Ford, November 7, 1995, pp. 172-173 and 192 to 197; Ford, November 14, 1995, pp. 49 to 99, 109-  
1
10 and 151-154; Ford, September 5, 1996, pp. 88-92 and 129-131; Ford, December 11, 2009, pp.  
6 and followings.  
6
2
13  
14  
See the subheading  
2
Levi, January 13, 2010, pp.50 -59  
500-05-001686-946  
PAGE: 48  
found in the files. I could understand one auditor making a mistake of this type in one  
area of the file once. I find it difficult to believe that the same type of error is found in  
terms of documentation in the files two or three times or more over two or three  
years».2  
15  
[
294] In cross-examination however, since the evidence before the Court clearly  
establishes that C&L erroneously recorded information and brought erroneous  
information forward from audits of previous years, Levi had no choice but to recognise  
that it was plausible that the so-called missing appraisals were merely errors made by  
the audit staff. 2  
16  
[
295] At the Court’s request (since counsel for the Defendants were alleging that  
documents referred to in the audit working papers had never been found, without  
Defendants testifying to that effect), counsel for Defendants provided a grocery list of  
what they purported were missing documents that their clients asserted or referred to in  
2
17  
their audit working papers for the years 1988, 1989 and 1990 . Counsel for the  
2
18  
Plaintiff raised an objection to certain of those references.  
[296] Having the list of the documents that are referred to in the audit working papers  
and that Defendants have characterized as missing (including reference to the same  
document in multiple audit years) that relate to subject matters that have been  
discussed in evidence, gives the Court the opportunity to look at them and consider, in a  
concrete manner rather than an abstract manner (fact rather than theory) the merit of  
the assertions that there would be a myriad of missing documents such that the Court  
cannot assess the work performed by C&L.  
[
297] Having done such an exercise, the Court concludes that the references in the  
audit working papers that were identified by counsel for the Defendants and which were  
subject matters discussed in evidence are quite evidently, in most cases, errors made  
by the audit staff.  
•
Appraisal by Mullins & Company in 1988219  
o On May 16, 2008, Ron Smith testified that there was no appraisal done by  
Mullins & Co. in 1988 – that the Mullins & Co. appraisal was done in 1983  
–
that by 1987, Mullins had left and joined Gillis & Co. – and that the  
220  
appraisal was done by Hughes in mid 1988.  
215  
216  
217  
218  
219  
220  
Levi, January 28, 2010, pp. 118-119.  
Levi, January 28, 2010, pp. 166-167.  
September 20, 2010 (pm), pp.101 to 121  
September 20, 2010 (pm),pp.118 and 121 to 125  
PW-1053-23, sequential page 153  
Ron Smith, May16, 2008, pp.154-155  
500-05-001686-946  
PAGE: 49  
o The Court record includes a Gillis appraisal done in 1988, PW-493, and  
signed by Mullins which supports Ron Smith’s assertion that there was no  
Mullins & Co. to perform an appraisal in 1988.  
•
Appraisal of 94 million dollars – mention “(Appraisal)” beside the “Total security”  
2
21  
title in the 1989 working papers  
o In 1988, there is a similar schedule in the working papers where it is  
2
22  
written «Total security: 94 million” without any reference to an appraisal .  
o In 1987, we see again the figure of 94 million of security referenced to the  
working paper B-41. Said working paper B-41 is a memo written by Ron  
Smith to Mr. Wilson, of Coopers & Lybrand, on February 24th, 1988,  
where Smith refers to an appraised value of the Maple Leaf Village of 130  
million and to first and second mortgages debts. On the memo, beside  
those figures provided by Ron Smith, there is the handwritten inscription:  
223  
approximately 94 million in security".  
"
The Court concludes that there never was an appraisal for 94 million. Ford added  
the word "Appraisal" without any further details, work got carried forward year  
after year mechanically. At the time of the 1987 audit working papers the  
appraisal that existed was of 130 million.  
The Court also concludes that there was no 1988 separate appraisal by Mullins  
for 130 million. Clearly in 1987 there was an appraisal already being relied on by  
Coopers & Lybrand of 130 million which could certainly not be a Mullins appraisal  
of 1988.  
•
Thorne-Riddell evaluation showing the common shares to be worth $19.50224  
o In both instances, in the 1988 working papers and in the 1989 working  
papers, the figure is referenced by tick mark “as per 1986 working paper  
file”. C&L is relying on its own product work – not on a third party paper.  
o Ron Smith testified that nobody ever questioned him about the common  
shares value, that the only reference he ever had was a letter from York-  
Hannover dated December 28, 1984, addressed to Stolzenberg, and that  
2
25  
he assumes that Thorne-Riddel were, at the time, the auditors of MLVII .  
2
2
2
2
2
21  
PW-1053-89, sequential page 261  
22  
23  
24  
25  
PW-1053-91, sequential page 248  
PW-1053-93, sequential pages 169-170  
PW-1053-23, sequential page 157 and PW-1053-19, sequential page 159  
Ron Smith, May 16th, 2008, p.150-151  
500-05-001686-946  
PAGE: 50  
o Daniel Séguin (the auditor who did the investment section in the 1988  
audit in Montreal) and Linda Belliveau (the auditor responsible for the  
investment section in Montreal for the 1989 audit) testified to the effect  
that they relied on their prior working papers and did not do any  
independent investigation to determine whether the value of $19.50 was  
2
26  
appropriate .  
o In the 1987 working papers, it is written that Thorne-Riddell performed an  
evaluation showing common shares to be worth $19.50 each “as per the  
227.  
986 working paper file”.  
1
o In the 1986 working papers, it is written “appears under secured, however  
Thorne-Riddell performed a valuation showing common shares to be  
worth 19.50 each” without any further reference to support this  
representation.2  
28  
o In the 1985 working papers, C&L is concerned that the loans are under  
secured but still writes “However, Thorne-Riddell performed an evaluation  
showing common shares to be worth $19.50 each” without any tick  
2
29  
legend .  
o On December 31, 1984 and under Stolzenberg’s signature, Castor  
Holdings Limited agreed and confirmed its acceptance of the proposed  
common shares valuation (at the bottom of the letter mentioned by Ron  
Smith, a letter dated December 28, 1984 from York-Hannover addressed  
to Stolzenberg and produced as exhibit PW-1073-1).  
2
30  
o Thorne-Riddell were the auditors of MLVII as of December 1984 .  
Exhibit PW-1073-1 is, in all probability, the source of the repeated reference to a  
Thorne-Riddell evaluation in the audit working papers of 1985, 1986, 1987, 1988,  
and 1989.  
•
Appraisal – Dove Canyon I and Dove Canyon II231  
o In 1989, under the column "Appraisal", the amount written for Dove  
Canyon I is $26,960,000 U.S. and the amount written for Dove Canyon II  
2
32  
is $29,710,000 U.S.  
2
2
2
2
2
2
2
26  
Séguin, December 12, 1995, pp.77-79, 89-92; Belliveau, April 12, 1996, pp.213-214  
PW-1053-27, sequential page 96  
27  
28  
29  
30  
31  
32  
PW-1053-35, sequential page 113  
PW-1053-38, sequential page 159  
PW-478  
PW-1053-83, sequential page 114 (for 1989); PW-1053-81, sequential pages 78 to 81 (for 1990)  
PW-1053-83, sequential page 114 (for 1989)  
500-05-001686-946  
PAGE: 51  
o In the commitment letter for Dove Canyon I, dated November 3, 1988, the  
2
33  
amount is $26,959,590 U.S.  
o In the commitment letter for Dove Canyon II, dated November 3, 1988, the  
2
34  
amount is $29,716,037 U.S.  
o Ron Smith testified that there were no such appraisals.235  
o Ford acknowledged that she had not written in her working papers that  
she had actually seen appraisals, that she did not recall when she could  
have received an appraisal, that she might have seen only a summary  
report and that her figures resembled seriously the maximum funding for  
each project.2  
36  
o The appraisals that existed for Dove Canyon I were done in April and  
2
37  
October 1988 ; the appraisals that existed for Dove Canyon II were done  
2
38  
in April and October 1988 .  
There are no missing appraisals for these projects and, in fact and again, this is  
an excellent example of a very clear audit error by Ford.  
•
Valuation of Hazelton lanes239  
o In the 1988 working paper, on the loan evaluation questionnaire filled by  
Daniel Séguin, the following inscriptions appear: “Appraisal (name):Royal  
2
40  
LePage; Appraisal (date) 1988; Appraisal (amount), 52.5million” . There  
is no specific date for the appraisal.  
o In the 1989 working paper, filled this time by Linda Belliveau, the same  
2
41  
types of reference appear: no details and no specific date .  
o In the 1990 working paper, filled by Martin Quesnel, again the same types  
2
42  
of reference appear: no details, no specific date and no tick marks .  
2
2
2
2
2
2
2
33  
PW-1115-6B  
PW-1114-7B  
34  
35  
36  
37  
38  
39  
Ron Smith, June 10, 2008, pp.193-196  
Ford, December 9, 2009, pp.43-45  
PW-1115-4 and PW-1115-7  
PW-1114-5 and PW-1114-9  
PW-1053-23, sequential page 182, (1988), PW-1053-19 sequential page 183 (1989) and PW-1053-15,  
sequential page 177 (1990)  
240  
241  
242  
PW-1053-23, sequential page 182  
PW-1053-19 sequential page 183  
PW-1053-15, sequential page 177  
500-05-001686-946  
PAGE: 52  
o Linda Belliveau cannot indicate what she relied on to write down that  
Hazelton Lanes had been appraised at 52 million dollars by Royal LePage  
in 1988. 2  
43  
.
o Quigley, a witness called by the Defendants, and who was working for  
YHDL at the time, testified that they had Royal LePage appraisals for  
various properties, but that they probably had only an internally prepared  
2
44  
estimate for Hazelton lanes.  
o Whiting’s testimony corroborates Quigley’s that there was no Royal  
2
45  
LePage appraisal performed on Hazelton lanes .  
o The figure of 52 million appears in a memorandum from Dean Anton of  
YHDL to Wersebe, Stolzenberg, Dragonas, Levesque and Smith dated  
2
46  
December 5, 1988 relating to a proposed “Scotia McLeod transaction”.  
Again, nothing is missing.  
Royal LePage appraisal – Southview mall247  
•
2
48  
249  
o In the 1987 working papers , the type of loan is “second mortgage” ,  
the reference to the collateral given is “shares” and their value is 5  
2
50  
251  
million , the amount of the first mortgage is 4 million and the reference  
2
52  
to the collateral available is 9 million but without any name of appraiser  
or date of appraisal. This appears to be the genesis of the information that  
appeared in the subsequent audit working papers.  
o In the 1988 working papers, on the loan evaluation questionnaire filled, the  
following inscriptions appear: “Appraisal (name): Royal LePage; Appraisal  
(
date) 1987; Appraisal (amount), 9 million” . There is no specific date for  
253  
the appraisal .  
o In the 1989 working papers, on the loan evaluation questionnaire filled by  
Linda Belliveau, the following inscriptions appear: “Appraisal (name):  
2
2
2
2
2
43  
Belliveau, May 22, 1996, pp. 328-330  
Quigley, March 15, 2010, p. 91  
44  
45  
46  
47  
Whiting, November 30, 1999 p.67  
D-137  
PW-1053-23, sequential page 178, (1988); PW-1053-19, sequential page 179, (1989); PW-1053-15,  
sequential page 180, (1990)  
248  
249  
250  
251  
252  
253  
PW-1053-27, sequential pages 194, 195 and 196  
PW-1053-27, sequential page 194  
PW-1053-27, sequential page 194  
PW-1053-27, sequential page 194  
PW-1053-27, sequential pages 195 and 196  
PW-1053-23, sequential page 178, (1988);  
500-05-001686-946  
PAGE: 53  
Royal LePage; Appraisal (date) 1987; Appraisal (amount), 9 million”.  
2
54  
There is no specific date for the appraisal .  
o Linda Belliveau testified and could not say if the collateral available was in  
fact a mortgage or shares. She acknowledged that she had reviewed the  
loan as a mortgage loan. She could not recall if she had seen an appraisal  
but she acknowledged that when she did she usually put a tick mark and  
2
55  
that there was none on her working paper.  
o In the 1990 working papers, on the loan evaluation questionnaire filled, the  
following inscriptions appear: again, “Appraisal (name):Royal LePage;  
Appraisal (date) 1987; Appraisal (amount), 9 million” – no specific date for  
the appraisal – but an appraisal of Shaske & Associates dated 1991, in  
2
56  
the amount of 8.3 million, is also mentioned .  
o Royal LePage was the only appraiser’s name with which many auditors  
who performed the investment section of the audit of 1988, 1989 and 1990  
were familiar with.  
o In 1988, the Southview shopping center was valued at approximately 7.8  
million as per the audited financial statements of Thorne Ernst & Whinney  
2
57  
for the year ended on September 30, 1988 . This information is very  
consistent with the notation in 1990 of the Shaske & Associates appraisal  
dated 1991, in the amount of 8.3 million.  
The Court concludes that nothing is missing.  
MLV project appraisals in 1989 and 1990258  
•
o In the 1989 working papers, there are two appraisals referred to – a  
Pannell Kerr Forster, 1989, of 104 million for the hotel, and a Hughes &  
2
59  
Associates appraisal, 1989, of 40 million for the shopping centre . At the  
bottom of the page, we see that the total of the appraisal is 144 million.  
The appraised value gets carried forward onto the next page (Page 170)  
at 144 million.  
2
2
2
2
2
2
54  
PW-1053-19, sequential page 179, (1989);  
Belliveau, May 23, 1996, pp. 516-520.  
55  
56  
57  
58  
59  
PW-1053-15, sequential page 180, (1990)  
PW-1163-9  
PW-1053-19, sequential page 169, (1989), and PW-1053-15, sequential page 160, (1990)  
PW-1053-19, sequential page 169  
500-05-001686-946  
PAGE: 54  
2
60  
o In the 1990 working papers, the same information is carried forward .  
This information was mechanically carried forward from one audit year to  
the next, with no verification of the information.  
o Ron Smith testified that he showed the auditors everything he had on  
hand2 which was:  
61  
!
!
a Mullin’s appraisal of 1983 in the amount of 130 million;  
a Hughes appraisal dated 1988 with figures of 67.7 million or 104  
million and a Pannell Kerr Forster study to back-up the Hughes’  
appraisal;  
!
a McKittrick appraisal dated 1989 for 26 million.  
o Ron Smith testified that Hughes never prepared an appraisal in the  
2
62  
amount of 40 million .  
2
63  
o Prychidny testified that in a memo there was a reference to a 40 million  
figure for the mall and developable land: 30 million for the mall, based on  
the McKittrick appraisal of 26 million, and 10 million for developable land,  
2
64  
on the input of Wersebe.  
Nothing is missing.  
•
Appraisals for the TWTC in 1989 and 1990265  
o In the 1989 working papers, references are made to a Royal LePage  
appraisal of 70 million for the condominiums and to a figure of 145 million  
for three office landsites offers, December 5, 1989. C&L added those  
figures and came up with a total of 235 million (instead of 215 million) – a  
clear mathematical error.  
o Same information is carried forward the next year, including the error, in  
2
66  
the 1990 working papers .  
2
67  
o Ron Smith testified that he never indicated that he had appraisals – he  
had estimates that had been provided to Castor by YHDL – one of 70  
2
2
2
2
2
2
2
2
60  
PW-1053-15, sequential page 160  
61  
62  
63  
64  
65  
66  
67  
Ron Smith, May 16, 2008, pp. 171-173  
Ron Smith, May 16, 2008, p 173  
D-145  
Prychidny, November 10, 2008, pp.115-117  
PW-1053-19, page 197, (1989) and PW-1053-15, sequential pages 222 and 223, (1990).  
PW-1053-15, sequential page 222  
Ron Smith, September 16th, 2008 pp. 180-183  
500-05-001686-946  
PAGE: 55  
2
68  
million for the condominiums and one of 145 million for the office sites –  
in both years, he showed the auditor the same thing.  
o PW-1069-8 is a letter from YHDL to Castor, dated September 13, 1989,  
enclosing the agenda for a TWTC partnership meeting which includes  
value information and where Royal LePage’s name appears.  
o PW-1069-13 is a confidential agreement dated December 5, 1989, that  
was made with Coldwell Banker Canada who was granted the exclusive  
right to obtain offers in respect of the property at a gross sales price of 145  
million dollars.  
Nothing is missing.  
•
Appraisals – TWTC for 1988 and 1989269  
o In the 1988 working papers, the following information appears: “Appraisal  
(
1
name) Stewart Young Mason Limited, (date) April 6th, 1987, (amount)  
270  
82 million to 285 million” .  
2
71  
o The same information appears in the 1989 working papers .  
o Ron Smith testified that he never provided the above-mentioned  
information to the auditors. The only thing he had and he showed them  
was an appraisal from Stewart Young Mason Limited dated February 12,  
1
987 with a value range of 62.6 to 104.6 million for the 50% interest on the  
272  
project controlled by YH and Bimcor .  
o PW-1069-17 is an extract from an appraisal from Stewart Young Mason  
Limited dated February 12, 1987 showing a value range of 62.6 to 104.6  
million.  
o Linda Belliveau testified that what appears on working paper E221, in the  
1
989 working papers, is a copy of the previous year where she had  
handwritten “Royal LePage” beside the name of Stewart Young Mason  
2
73  
Limited .  
Nothing is missing.  
2
2
2
2
2
2
68  
PW-1069-8  
69  
70  
71  
72  
73  
PW-1053-23, page 201 (1988), PW-1053-19, page 198, (1989)  
PW-1053-23, page 201  
PW-1053-19, page 198  
Ron Smith, September 16, 2008, pp.177-178  
Belliveau, April 11, 1996, p.41  
500-05-001686-946  
PAGE: 56  
•
Securities kept in Schaan274  
o When Ford made her note “loan supported by securities of other  
companies held in safekeeping in Schaan”, she was not doing a valuation  
2
75  
of Lambert Securities loans .  
o The securities of other companies supporting the loan and held in  
safekeeping in Schaan were described in schedule A of the pledge  
2
76  
agreement .  
2
77  
o Other documents are evidence of those securities .  
Nothing is missing.  
•
Cadiz Landfill and appraisal of 6.4. million listed278  
o Ford listed an appraisal of 6.4 million for the Cadiz Landfill, but there are  
no tick marks in her working paper. Moreover, at the bottom of the page,  
Ford wrote: “"It is our understanding that appraisal reports are held in  
Cyprus and we would appreciate receiving a summary of the reports  
providing the minimum following information."  
o The information that was provided to C&L appears in the same volume of  
2
79  
working papers : a summary, as requested, indicating a value of 6.4  
million.  
Clearly, nothing is missing.  
•
Some loan ledger cards (part of PW-167)  
o Plaintiff acknowledges that some loan ledger cards are missing. The list of  
such missing loan ledger cards has been produced as PW-167-1A.  
o Rancourt has testified that the information can be reconstituted from the  
mortgage spreadsheet (PW-107) as well as the interest receipts.  
[
298] Other references that were identified by Counsel for the Defendants, under  
objection from Counsel for the Plaintiff as mentioned previously, are totally irrelevant to  
2
2
2
2
74  
75  
76  
77  
PW-1053-89, page 255  
Ford, December 11, 2009, pp.76-87  
PW-1195  
PW-1079-4 (Telex from Ron Smith to Banziger), part of PW-136; PW-136 (various shares certificates),  
PW-1053-93, sequential page 150 (B-26) – working papers of 1987; PW-1053-95, sequential page  
1
81 to 196 (B-31) – working papers of 1986; PW-1079-12  
278  
79  
PW-1053-83, sequential page 103  
PW-1053-83, sequential page 144  
2
500-05-001686-946  
PAGE: 57  
the issues that were raised with witnesses during examination before and during trial.  
However, given the general issue of reliability of books and records that Defendants  
have raised and their suggestion to the Court to draw inferences of deceit or fraud on  
the auditor from any evidence of missing documents, the following remarks are  
essential.  
•
If Defendants wanted the Court to draw inferences from the fact that documents  
would have been seen and used by them whereas they were later missing, the  
burden of proof rested on them.  
•
•
A statement by counsel is no evidence, and the objection raised by Counsel for  
2
80  
the Plaintiff on September 20, 2010 is maintained .  
As noted during the oral representations on September 24, 2010, Plaintiff’s  
Counsel had things to say and documents to show to rebut Defendants’ Counsel  
2
81  
suggestions of further missing documents .  
[
299] Bottom line, the Court shares Vance’s point of view that the concern about the  
books and records of Castor “has no basis, given the documentation that exists and  
2
82  
given the correlation between the documents and the working papers” .  
[
300] In fact, one of the remarkable aspects of the Castor case is the completeness of  
Castor’s documentation. As Vance testified «it’s almost extraordinary the degree of  
completeness of the Castor’s books and records that I reviewed considering that  
Castor, as an [active] company, was no longer alive as we referred to it. »  
2
83  
YH books and records  
[
301] There is no evidence that C&L asked for or relied on any YH documents that  
were not amongst Castor’s books and records.  
[
302] There is nothing in the evidence of Sharma, trustee in bankruptcy to YHDL, to  
support the conclusion that the documents in the possession and control of the Trustee  
of YHDL are unreliable in any way that did or could have affected the audits performed  
by C&L.  
[
303] The documents that have been filed into evidence assist the Court in  
understanding the factual matrix relevant to issues such as the financial condition of  
Castor’s most important group of borrowers and the various YH loans and projects  
being financed by Castor.  
2
80  
81  
Transcript, September 24, 2010, p.6  
2
Transcript, September 24, 2010, pp.3 to 8, Trial notes, September 24, 2010, Transcript, September  
2
8, 2010, pp.3-5 ,Trial notes, September 28, 2010 and sealed envelope  
2
82  
83  
Vance, April 16, 2010, p. 79  
Vance, April 16, 2010, p. 71.  
2
500-05-001686-946  
PAGE: 58  
[
304] The evidence is corroborated by the testimony of witnesses from Castor and YH  
and is reliable.  
Th e n egligen ce issu e as it relat es t o t h e  
au dit ed con solidat ed fin an cial st at em en t s  
Questions and tools  
[
305] Deciding the negligence issue as it relates to the audited consolidated financial  
statements requires answering the two following questions:  
•
•
Are the audited consolidated financial statements of Castor for 1988, 1989 and  
990 materially misstated and misleading?  
1
Did C&L commit a fault in the professional work that they performed in  
connection with the audits of Castor for 1988, 1989 and 1990?  
[
306] The identification, interpretation and application of the generally accepted  
accounting principles (“GAAP”) are at the heart of the required analysis of the first  
question.  
[
307] The identification, interpretation and application of the generally accepted  
auditing standards (“GAAS”), including the impact of fraud on the auditor, are at the  
heart of the required analysis of the second question.  
Overview of expert opinions on GAAP and GAAS  
[
308] All experts agree that C&L had to comply with GAAP and GAAS at all relevant  
time.  
Plaintiff’s experts  
[
309] Three expert witnesses appeared on behalf of the Plaintiff and testified on the  
negligence issue as it relates to the consolidated audited financial statements: Keith  
Vance (“Vance”), Kenneth Froese (“Froese”) and Lawrence S. Rosen (“Rosen”).  
Vance  
[
310] Vance opines that:  
500-05-001686-946  
PAGE: 59  
•
“the audits carried out by C&L for each of the years 1988, 1989 and 1990 were  
2
84  
inadequate and did not meet GAAS”;  
•
“these financial statements contained material misstatements and were  
misleading owing to (…) departures from GAAP, that, had GAAS been complied  
2
85  
with, should have been identified and acted on by the auditors ” ;  
•
•
“departures from GAAP (…) should have been uncovered and/or addressed by  
2
86  
an audit that was in compliance with GAAS” ;  
“In view of the materiality of the above departures from GAAP, C&L, had they  
determined the extent of the misstatements, should have seriously considered  
whether the going concern basis of accounting was appropriate in the  
2
87  
circumstances” .  
[
311] Vance concludes that «considering the extent of the misstatements in the  
consolidated financial statements of Castor for the years ended December 1988, 1989  
and 1990, C&L should not have issued unqualified opinions on these financial  
statements, but should have either denied an opinion or issued an adverse opinion  
indicating the extent to which the financial statements were materially misleading and  
stating that these financial statements did not present fairly the financial position, results  
2
88  
of operations and changes in financial position of Castor.»  
F roese  
[
312] Froese opines that «Castor’s financial statements for the years ended December  
1, 1990, 1989 and 1988 did not comply with GAAP in relation to loans in relation to…”  
3
and that “the financial implications to Castor of placing the above loans on a non-  
accrual basis, and the magnitude of the increase in Castor’s allowance for loan losses,  
created uncertainty as to Castor’s ability to continue as a going concern at least as early  
as December 31, 1988».2  
89  
[
313] On the issue of fraud, Froese opines that  
•
“the extent of suspicious circumstances in each of the years from 1988 to 1990  
was such that C&L should have had suspicions as to management’s integrity and  
the possibility of material financial statement fraud. Some of the suspicious  
circumstances were apparent in the scope limitations agreed to by C&L, others  
were contained in the evidence gathered in C&L’s audit working papers but not  
284  
285  
286  
287  
288  
289  
PW-2908, Vol.1, S-22  
PW-2908, Vol.1, S-23  
PW-2908, Vol.1, S-24  
PW-2908, Vol.1, S-25  
PW-2908, Vol. 1, S-25; See also PW-3033, pp. 1-3; PW-3034, pp. 9-11, at p. 11.  
PW-2941, Vol. 1, pp. 24-26.  
500-05-001686-946  
PAGE: 60  
identified as such by C&L, and other red flags were apparent in loan files and  
2
90  
Castor’s financial records”; .  
•
“sufficient appropriate audit evidence” was readily available to C&L to permit C&L  
to conclude that Castor’s consolidated financial statements were materially  
misstated in each of the years ended December 31, 1990, 1989 and 1988, in  
spite of the alleged fraud by management and others”.  
2
91  
R osen  
[
314] Rosen concludes that GAAP and GAAS were breached and that the audited  
292  
financial statements had no relationship to the reality of Castor .  
A major conclusion is that C&L did not conduct their audit in accordance with  
generally accepted auditing standards (“GAAS”), that the consolidated financial  
statements of Castor were not prepared in accordance with generally accepted  
accounting principles (“GAAP”) and that the consolidated financial statements  
were materially misleading.2  
93  
Notwithstanding the passage of time and my review of various exhibits produced  
during the first trial before Mr. Justice Carrière, the conclusions that I reached in  
the Initial Report have not changed (…)2  
94  
[
315] Rosen also concludes that the claim by C&L that any GAAP and GAAS and  
related deficiencies in Castor’s 1988, 1989 and 1990 financial statements would be due  
to incomplete, inaccurate, false or misleading information provided to the Defendants by  
Castor through its Directors, Officers, senior employees and consultants was “clearly  
2
95  
inappropriate and unwarranted” .  
Defendants’ experts  
[
316] Three expert witnesses appeared on behalf of the Defendants and testified on  
the negligence issue as it relates to the consolidated audited financial statements:  
Donald Selman (“Selman”), Russell Goodman (“Goodman”) and Phillip Levi (“Levi”).  
[
317] None of Defendants’ expert witnesses provided an overall opinion on the audited  
financial statements.  
290  
291  
292  
293  
294  
295  
PW-2941, Vol. 1, page 153, paragraph 8.30,  
PW-2941, Vol. 1, page 153, paragraph 8.31,  
Rosen, Transcript February 5, 2009, pp. 157-158.  
PW- 3033, volume 1, « Brief summary section »  
PW-3034, page 1  
PW-3034, pages 2 and 3  
500-05-001686-946  
PAGE: 61  
•
Selman’s mandate was limited to specific GAAP and GAAS issues, excluding the  
296  
loan loss provision aspect .  
•
Goodman’s mandate was limited to the valuations of certain loans and to GAAP  
issues relating thereto :  
“
Price Waterhouse was engaged by counsel to C&L in 1993 in connection with  
litigation between the Plaintiffs and C&L relating to the failure of Castor. The  
purpose of the Price Waterhouse engagement was to provide opinions in  
connection with the valuations, in accordance with GAAP, of Castor's loans for  
the years ended December 31, 1988, 1989 and 1990. My report entitled the Price  
Waterhouse Report on Loans dated May 29, 1998 was issued pursuant to the  
initial engagement.  
In February 2008, l was asked by counsel to prepare this Updated Report on  
Loans in order to consider trial evidence as well as the reports of Messrs. Vance,  
Froese, Rosen and Brenner. I was asked to consider only Castor's loans to the  
YH Group and DT Smith Group and to exclude from consideration any loans for  
which Messrs. Vance, Froese and Rosen did not suggest loan loss provisions.  
With respect to the loans to the YH Group and DT Smith Group, this Updated  
2
97  
Report on Loans replaces my 1998 Price Waterhouse Report on Loans”.  
•
Levi’s mandate was “to provide an expert opinion with regard to any evidence of  
fraudulent activities or transactions in relation to the audit of Castor Holdings Ltd.  
for the years ended December 31, 1988, 1989 and 1990 as well as any other  
matters pertaining to this litigation on which I am able to provide expertise” .  
2
98  
S elman  
[
318] There is no overall conclusion or opinion section in Selman’s report. Selman was  
299  
engaged to carry out specific assignments .  
G oodman  
[319] Goodman’s overall conclusion reads as follows:  
Having carried out my own examination for purposes of this Updated Report on  
Loans, I conclude that, in my opinion, the consolidated financial statements of  
Castor for the years ended December 31, 1988, 1989 and 1990 were not  
misstated as a result of errors in the measurement and valuation of Castor's  
lnvestments in mortgages, secured debentures and advances. Castor's loan loss  
296  
297  
298  
299  
D-1295, page 1 section 1.01  
D-1312, page ES1  
D-1347, page 1  
D-1295, page 1  
500-05-001686-946  
PAGE: 62  
provisions were reasonable, and additional losses were not probable and  
estimable.  
The Plaintiffs' Experts would have one believe that Castor's lnvestments in  
mortgages, secured debentures and advances to the YH Group and DT Smith  
Group were overstated by hundreds of millions of dollars as at December 31,  
1
990 and by very significant amounts in the years preceding as well. I am of the  
opinion that the Plaintiffs' Experts' conclusions regarding the valuation of Castor's  
investments in mortgages, secured debentures and advances for the years  
300  
ended December 31, 1988, 1989 and 1990 are not in accordance with GAAP.  
(
our emphasis)  
L evi  
[320] Levi’s overall opinion and conclusion reads as follows:  
The ultimate determination of fraud is a decision for the trier of fact.  
Nevertheless, I am of the opinion that the schemes and activities carried out by  
Wolfgang Stolzenberg and his co-conspirators are fraudulent in nature and  
resulted in the deception, concealment and trickery which prevented the  
DEFENDANTS from detecting the true nature of some of the transactions  
they were auditing.  
On the basis of the evidence which I have examined, it is my opinion that the  
fraudulent activities summarized below and the careful and detailed  
concealment, deceit and misrepresentation perpetrated by Wolfgang Stolzenberg  
and his coconspirators was instrumental in preventing the auditor, when applying  
Generally Accepted Auditing Standards, from detecting any irregularities or  
improper representations in the audited financial statements of Castor Holdings  
301  
Ltd. (our emphasis)  
General observations on available experts’ opinions  
[
321] Plaintiff’s experts were assigned similar mandates, and each brought a unique  
perspective and experience to his assessment of the fundamental questions that the  
Court must answer in this auditors’ negligence case.  
[
322] Plaintiff’s experts, with distinctly different background and experience, all  
independently arrived at the same conclusion that the audited financial statements of  
Castor for 1988, 1989 and 1990 contained material misstatements that should have  
been identified and would have been identified by C&L but for their negligent audit work.  
[323] Defendants’ experts were assigned different mandates, exclusive of each other.  
3
00  
01  
D-1312, page ES-35  
D-1347, page 245  
3
500-05-001686-946  
PAGE: 63  
[
324] Defendants’ expert witnesses advanced a number of theories contradictory at  
first glance, if not mutually exclusive. For example:  
•
Levi and Selman opined that the failure of C&L to detect the “true nature” of the  
transactions they were auditing resulted, in the words of Levi, from the fact that:  
«
Wolfgang Stolzenberg managed to organize a group of co-conspirators to  
302  
participate in an elaborate, complex and massive fraud» . Goodman opined  
that Castor was a legitimate business model and that the carrying values of the  
YH and DT Smith loans were not misstated on the audited consolidated financial  
statements of Castor during the relevant years (although he ultimately conceded  
3
03  
a small loss exposure for 1990) .  
•
•
Selman and Levi opined that various loans were fraudulent304 while Goodman  
opined that these same loans were made for a valid business purpose and were  
3
05  
not misstated on the audited consolidated financial statements .  
Selman and Levi opined that cash circles at year-end which involved transfers to  
3
06  
while Goodman opined that these same  
and from a law firm were a fraud  
transactions were a positive and legitimate business practice and mechanism  
3
07  
being utilized by Castor .  
•
Selman and Levi opined that Castor used backdated documents to deceive the  
auditors and to demonstrate the existence of transactions at times when they did  
3
08  
while Goodman opined that back-dating documents could be a  
not occur  
3
09  
normal part of Castor’s business raising no problems of GAAP .  
General observations on expert evidence  
[
325] The Court cannot express the duties and responsibilities of an expert witness  
better than Justice Cresswell did in National Justice Compania Naviera S.A. v.  
3
10  
:
Prudential  
3
3
3
02  
03  
04  
D-1347. P.2. para.1.2  
D-1312-6  
For example – the 40 million$ loans (called the “nasty nine”) made at the end of 1990: Selman – D-  
1
295, p.366 and Selman, May 25, 2009, pp. 211 to 215; Levi – D-1347, p.85 and January 28, 2010,  
pp. 38-39, 46-47  
305  
For example - the 40 million$ loans (called the “nasty nine”) made at the end of 1990: Goodman,  
September 22, 2009, pp. 97-98; October 9, 2009, pp. 113, 156, 160 to 171, 189-190;October 26,  
2
009 pp. 271-272  
306  
307  
308  
Levi, January 28, 2010, pp.241-243; Selman, May 7, 2009, pp.42-46  
Goodman, October 26, 2009, p.257:October 27, 2009, pp.105-107; November 24, 2009, pp.244-247  
D-1347, pp. 2, 87, 99-103, 147, 150, 152, 159, 207, 214, 246; Selman, May 7, 2009, p. 53; Selman,  
May 26, 2009, pp. 65-66.  
3
09  
10  
Goodman, October 27, 2009, pp. 29-32.  
3
[
I993] 2 Lloyd's Rep. 68  
500-05-001686-946  
PAGE: 64  
1
. Expert evidence presented to the Court should be and should be seen to be  
independent product of the expert uninfluenced as to form or content by the  
exigencies of the litigation (…)  
2
. An expert witness should provide independent assistance to the Court by way of  
objective unbiased opinion in relation to matters within his expertise … An expert  
witness (…) should never assume the role of advocate.  
3
. An expert witness should state the facts or assumptions on which his opinion is  
based. He should not omit to consider material facts which detract from his  
concluded opinion (…)  
4
. An expert witness should make it clear when a particular question or issue falls  
outside his expertise.  
5
. If an expert’s opinion is not properly researched because he considers that  
insufficient data is available then this must be stated with an indication that the  
opinion is no more than a provisional one (…)  
6
. If after exchange of reports, an expert witness changes his views on a material  
matter (…) such change of view should be communicated (…) to the other side  
without delay and when appropriate to the Court.  
7
. Where expert evidence refers to photographs, plans, calculations, survey reports  
or other similar documents they must be provided to the opposite party at the same  
time as the exchange of the reports.  
Credibility and reliability of expert evidence  
Legal principles and tools to assess credibility and reliability  
[
326] “Before any weight can be given to an expert’s opinion, the facts upon which the  
311  
opinion is based must be found to exist” .  
[
327] “As long as there is some admissible evidence on which the expert’s testimony is  
based it cannot be ignored; but it follows that the more an expert relies on facts not in  
3
12  
evidence, the weight given to his opinion will diminish” .  
[
328] An opinion based on facts not in evidence has no value for the Court. 313  
3
11  
12  
R. v. Abbey, [1982] 2 S.C.R. 24 at p. 46; AZ-82111071; J.E. 82-762; R. v. Warsing, [1998] 3 S.C.R.  
79 at para. 54; AZ-99111001; J.E. 99-107.  
R. v. Warsing, [1998] 3 S.C.R. 579 at para. 54 ; AZ-99111001; J.E. 99-107  
5
3
500-05-001686-946  
PAGE: 65  
[
329] With respect to its probative value, the testimony of an expert is considered in  
314  
the same manner as the testimony of an ordinary witness . The Court is not bound by  
the expert witness’s opinion. 3  
15  
[
330] An expert witness’s objectivity and the credibility of his opinions may be called  
into question, namely, where he or she :  
3
16  
•
•
accepts to perform his or her mandate in a restricted manner ;  
presents a product influenced as to form or content by the exigencies of  
3
17  
litigation ;  
3
18  
•
•
shows a lack of independence or a bias ;  
has an interest in the outcome of the litigation, either because of a relationship  
3
19  
with the party that retained his or her services or otherwise ;  
320  
advocates the position of the party that retained his or her services ; or  
•
3
13  
14  
RCMP v. Tahmourpour, [2009] FC 1009 (CanLII), paras, 61-67; Paillé v. Lorcon Inc. [1985] AZ-  
8
5011264 (QC CA); J.E. 85-841.  
3
P.L. c. Benchetrit [2010] QCCA 1505, para.25 to 31; AZ-50666756; J.E. 2010-1600; Shawinigan  
Engineering Co. c. Naud, [1929] R.C.S. 341 at 343; Lapointe c. Hôpital Le Gardeur, [1992] 1 R.C.S.  
351 at 358; AZ-92111029; J.E. 92-302.  
3
15  
16  
Royer, Jean-Claude, La preuve civile, 4 éd. Cowansville, (Qc), Yvon Blais, 2008, at §120, 484; Droit  
de la famille – 103252, [2010] QCCA 2173; AZ-50695343; P.L. c. Benchetrit [2010] QCCA 1505,  
para.25 to 31; AZ-50666756; J.E. 2010-1600; L.F. c. A.D., AZ-50342156 at paras. 76, 81, 83, J.E.  
2006-9, [2006] R.D.F. 175 (rés.).  
3
Club de voyages Aventures (Groupe) inc. c. Club de voyages Aventure inc., REJB 1999-13211 at  
paras. 31, 56-58, 82, AZ-99021695 (S.C.); Tremblay c. Perrone (Succession de), [2006] QCCS 3073  
at paras. 69-71, AZ-50376939; J.E. 2006-1624 appeal dismissed, [2007] QCCA 1604; Danny's  
Construction Company Inc. c. Birdair inc., EYB 2010-169584 at paras. 381, 392, 396-398, 404-405,  
4
12-413, 416-417, 453 (S.C.); Tourbières Premier ltée c. Société coopérative agricole régionale de  
Rivière-du-Loup, REJB 2001-23507 at paras. 30-35, 50 (C.A.); J.E. 99-1435 (S.C.), appeal  
abandoned, (C.A., 1999-11-25), 500-09-008380-990.  
317  
318  
319  
National Justice Compania Naviera S.A. v. Prudential [I993] 2 Lloyd's Rep. 68  
National Justice Compania Naviera S.A. v. Prudential [I993] 2 Lloyd's Rep. 68  
Club de voyages Aventures (Groupe) inc. c. Club de voyages Aventure inc., REJB 1999-13211 at  
paras. 31, 56-58, 82, AZ-99021695 (S.C.); Orenstein-Little c. Héneault & Gosselin inc., [2008] QCCS  
3
2
2
730 at paras. 73-76, AZ-50509716, J.E. 2008-1713; Perron c. Audet, AZ-50113443 at paras. 217,  
30-242 (S.C.); Audet c. Landry, [2009] QCCS 3312 at paras. 82-83, 93, 98, AZ-50566973, J.E.  
009-1472, [2009] R.R.A. 796, inscription in appeal, 200-09-006776-097.  
320  
Perron c. Audet, AZ-50113443 at paras. 201, 239-242 (S.C.); Fortin c. Compagnie d'assurances  
Wellington, AZ-00026200 at 12-15 (S.C.), B.E. 2000BE-416, appeal dismissed, AZ-50522725, leave  
to appeal to S.C.C. refused, 28149, revision of decision refusing leave to appeal to S.C.C. dismissed,  
2
8149; Compagnie d'assurances St-Paul/St-Paul Fire & Marine Insurance Company c. SNC-Lavalin  
inc., [2009] QCCS 56 at paras. 68-77, AZ-50530600, J.E. 2009-255, inscription in appeal, 500-09-  
19384-098; Convergia Networks inc. v. Bell Canada, REJB 2003-41397 at para. 168-169 (S.C.);  
Danny's Construction Company Inc. c. Birdair inc., EYB 2010-169584 at paras. 381, 396, 433-435,  
49-450 (S.C.).  
0
4
500-05-001686-946  
PAGE: 66  
•
selectively examines only the evidence that supports his or her conclusions or  
accepts to examine only the evidence provided by the party that retained his or  
3
21  
her services .  
Assessment of credibility and reliability  
P laintiff’s experts  
General comments  
[
331] None of the Plaintiff’s experts has embarked into the project or the task of  
redoing the 1988, 1989 and 1990 audits of Castor: it was neither possible nor called for.  
[
332] Plaintiff’s experts have provided opinions on the actual work performed by C&L,  
using as starting points actual figures and information C&L was provided with, as it  
3
22  
and C&L’s employees’ examinations by the  
appears from C&L’s working papers  
Trustee in bankruptcy.  
Vance  
[
333] Even though he has never audited a client like Castor, a factor which is not  
decisive since Castor was quite a unique organisation, Vance has knowledge and  
experience that is directly applicable to this litigation.  
•
•
During the most relevant years, 1988 to 1991, he served on the CICA auditing  
standards committee, which was charged with determining GAAS and updating  
3
23  
the Handbook .  
His clients have included secured and unsecured lenders and real estate  
developers, such that he has experience applying standards at issue in the  
present case, and he has carried out reviews of large credit union files, such that  
3
24  
he is well placed to compare them to Castor .  
[
334] Vance made changes to his loan loss provisions as they appeared in his first  
report for the first trial, and these were incorporated in his second report, for the second  
3
21  
Audet c. Landry, [2009] QCCS 3312 at paras. 61-68, AZ-50566973, J.E. 2009-1472, [2009] R.R.A.  
7
96, inscription in appeal, 200-09-006776-097; X Merchant inc. c. Ginsberg, Gingras & Associés inc.,  
EYB 2009-158718 at paras. 199-209 (S.C.); Boiler Inspection and Insurance Co. of Canada c. Manac  
inc./Nortex, AZ-50194738 at paras. 176-193, J.E. 2003-2156, [2003] R.R.A. 1415 (rés.), Principal  
grounds of appeal dismissed and incidental appeal allowed with partial dissent, [2006] QCCA 1395,  
Principal appeal allowed and incidental appeal dismissed, [2006] QCCA 1398; Perron c. Audet, AZ-  
5
0113443 at para. 99 (S.C.).  
322  
323  
324  
Exhibits PW-1053 (PW-1053-1 to PW-1053-121)  
Vance, March 4, 2008, p. 28.  
Vance, March 4, 2008, pp. 30-32.  
500-05-001686-946  
PAGE: 67  
trial. The fact that he made changes is not decisive: all experts have made changes and  
experts are expected to communicate any change of views. The issue is not whether  
experts have changed their views, but why they have (or have not) done so, and  
whether they volunteered the change or waited until they were challenged in cross-  
examination.  
[
335] On one hand, Vance was cross-examined in the first trial and debriefed by  
325  
counsel prior to testifying in the second trial . On the other hand, counsel for the  
Defendants had unprecedented tools to conduct their cross-examination in the second  
trial, namely thousands of pages of prior testimony of Vance.  
[
336] In his report and in his testimony, Vance stated the facts and assumptions on  
which his opinions were based and more often than not those facts and assumptions  
are found to exist or to be right, as later discussed in the present judgment.  
[337] Vance’s mandate does not raise an issue of restrictions or limitations.  
[
338] Vance has advocated the position of the claimants sometimes. To various  
extents many of the expert witnesses who appeared before the Court did advocate the  
position of the party that retained their services. Although Vance did, the Court  
concludes that it was done out of conviction and not out of a lack of independence or a  
bias. Besides, there is no evidence to suggest that Vance has an interest in the  
outcome of the litigation that could impair his objectivity.  
[
339] In a few occurrences in cross-examination, if he had to qualify a previous remark  
or acknowledge a mistake, Vance reluctantly did so. Although not leading to a negative  
assessment on credibility and reliability, such an attitude attracted the Court’s attention.  
It is a factor taken into account when time come to assess opinions on specific topics.  
Froese  
[340] Froese has knowledge and experience that is directly applicable to this litigation.  
•
•
•
In 1985, Froese joined the firm Doane Raymond in the professional standards  
department, researching and providing advice on Canadian GAAP and GAAS.  
From 1985 to 1988, he converted his firm’s audit approach to a risk-based  
approach.  
During the relevant years, Froese devoted more than half of his professional  
practice to the audit of Central Capital, first as audit manager and then as senior  
audit manager. He testified that Central Capital had a merchant financing  
department with loans to both real estate developers and to operating  
businesses and its portfolio was, in a number of ways, comparable to Castor.  
325  
Vance, April 17, 2008, pp.143-144  
500-05-001686-946  
PAGE: 68  
o Froese was involved in the planning of the audits, supervising the audit  
team and reviewing the loan files and the financial statements.  
o Froese requested appraisals for collateral in the form of real estate when  
he, as auditor, determined that the existing appraisal was stale-dated, and  
he conducted site visits to the properties, such as Chino Hills in California.  
•
•
His experience as an auditor and in professional standards is exceptionally  
relevant in assessing the adequacy of the work performed by C&L, including on  
the issue of the review of appraisals by auditors.  
In 1991, Froese was named partner of Doane Raymond and it was at this time,  
after the relevant years for the present litigation, that Froese’s practice became  
primarily focused on forensic accounting.  
[341] Froese’s mandate does not raise an issue of restrictions or limitations.  
[
342] Froese has not advocated a position. Straightforward, he gave his candid opinion  
on the issues he looked at.  
[
343] In cross-examination, if he felt he had to do so, Froese neither hesitated to  
acknowledge a mistake or to qualify a previous remark.  
[
344] In his report and in his testimony, Froese stated the facts and assumptions on  
which his opinions were based and more often than not those facts and assumptions  
are found to exist or to be right, as later discussed in the present judgment.  
[
345] Because Froese did not bring forward admissions he would have made during  
cross-examination to a corrected report he provided during his testimony, Defendants  
argue it impeaches his credibility. The Court does not share this view: the purpose of  
the corrected report was specific, there was not enough time to ask for more and  
Froese’s testimony was already part of the Court record.  
Rosen  
[346] Rosen has knowledge and experience that is directly applicable to this litigation.  
•
Since 1972, Rosen has taught and continues to teach accounting, auditing and  
the integration of a professional accounting program at York University.  
•
His opinion is sought frequently by audit firms and by audit committees on the  
types of issues that would be considered by an engagement partner, and on the  
3
26  
preparation of financial statements in accordance with GAAP .  
326  
PW-3030; Rosen, January 28, 2009, pp. 195–203; January 29, 2009, pp. 32–35.  
500-05-001686-946  
PAGE: 69  
•
Over the years, he has been hired by accounting firms, namely the “big 4”, to  
327  
teach and lecture their students on GAAP and GAAS issues .  
•
However, Rosen’s experience is limited since he has never signed an audit  
opinion and he has never prepared financial statements for a company that has  
activities similar to Castor.  
[
347] During his cross-examination, Rosen was challenged as to the kind of opinion he  
was providing the Court with. Rosen affirmed that he was providing the Court with his  
professional opinion as to what the generally accepted standards of the profession were  
during the relevant time and not with his personal views as an educator.  
[
348] Defendants argue that Rosen is using the present case as a platform or  
illustration to vindicate the view that he's taken publicly for over 20 years. Because he is  
an advocate for change, they suggest that he does not have the required neutrality and  
objectivity.  
[
349] Defendants further argue that the Court should give no credibility to Rosen’s  
opinions, namely and not restrictively because:  
•
Rosen would have admitted changing his stated views to suit his audience,  
including having written something in an expert’s report that he did not believe  
3
28  
because it was easier than quarrelling with the lawyers ;  
•
•
Rosen did not volunteer known errors in his report even though he knew about  
the read-in rule applied by the Court ;  
Rosen gave an opinion about the share valuation letters, despite having tried to  
pass the exam for his Chartered Business Valuator designation (“CBV”) 4 times,  
3
29  
and failed ;  
3
30  
•
•
Rosen has referred to Castor or this litigation in public articles ;  
Rosen did not provide contrary views even when he was aware they existed,  
knowing however he should do so since it is part of his writings about what an  
3
31  
expert should do ;  
•
Rosen is of the view that C&L is behind the problems with GAAP as he perceives  
them3 ; and  
32  
327  
328  
329  
330  
331  
332  
Rosen, January 29, 2009, pp. 104-106  
Rosen, January 29, 2009, pp. 58-59; Rosen April 6, 2009, pp. 110-114  
Rosen, January 29, 2009 p. 111-120  
D-1107, D-1108, D-1097, D-1109, D-1098  
Rosen, February 17, 2009 p. 36-57; Rosen, February 20, 2009 p. 248-249  
Rosen, January 29, 2009 p. 104-109; D-1106  
500-05-001686-946  
PAGE: 70  
•
Rosen has business interest in a corporation which offers advice to end-users of  
financial statements; he is therefore in a fundamental situation of conflict of  
interest.  
[
350] Rosen has unequivocally taken a very public position on the standards he is  
being called upon to provide his expert opinion. He's a vociferous critic of those norms,  
3
33  
334  
of those standards. He has called those standards loose , pathetic and full of  
3
35  
contradictions and feeble definitions . He has also referred to Castor or to this  
litigation in public articles. These are factors taken into account when the time comes to  
assess specific opinions.  
[
351] Adapting writings or presentations to the sophistication of a particular audience  
and the nature of its interest in a topic, that is not at all surprising and that is not the  
point. The crux of the matter is whether it entails distortion or misrepresentation.  
[
352] Rosen tried four times to pass the CBV exam and failed: those are facts that he  
admitted without hesitation when questioned in cross-examination. However, in all  
fairness to Rosen, relying on appearances is not acceptable in light of the  
circumstances described by Rosen which have not been contradicted.  
Right. And you wrote by name and I regret this has to come up, but it was very  
political. I was the architect of the CAs case exam, I was asked to introduce it  
into the CBVs, it got into a political fiasco and there were two (2) camps, a group  
that supported me, a group that didn't support me. And the outcome was I never  
got the CBV and I gave up3  
36  
.
Two (2) were challenge exams, two (2) were written, but I had passed all of the  
337  
exams of the University of Toronto in preparation for the CBV  
.
I was failed by them four (4) times, but it was very political. You're not being fair.  
People who were marking my exams were people who had failed the CA exams  
or had considerable trouble in my courses, so when you write by name and you  
have those problems, like I've passed everything else in my life, it seems a little  
odd that I somehow could not pass this particular technician-type CBV3  
38  
.
[
353] Not providing contrary views when one is aware they exist is detrimental to one’s  
credibility. However, given the need to look at things in a context, the following few  
extracts of Rosen’s testimony put things in perspective.  
Extract # 1  
333  
334  
335  
336  
337  
338  
Rosen, January. 29, 2009 p.36-37; D-1097 and D-1098  
Rosen, January. 29, 2009 p. 48-51; D-1100  
Rosen, January. 29, 2009 p. 38-42; D-1099  
Rosen, January 29, 2009, p.119  
Rosen, January 29, 2009, p.119  
Rosen, January 29, 2009, p.120  
500-05-001686-946  
PAGE: 71  
Q. You understand that, in your role as an independent expert of the Court, your  
views and opinions are to be expressed in a neutral and objective manner?  
A. I understand that, I think this is an unusual case in the sense that it didn't take  
very long looking at the documents to realize there was a very serious problem  
here.  
So I think you'll find in the reports there are just many, many situations where the  
benefit of the doubt was given to Coopers & Lybrand, but by the same token the  
dollar is so huge and the evidence to me was so overwhelming that it may be  
difficult to detect.  
Like there are times where I just couldn't possibly think of any support for what  
339  
Coopers & Lybrand was saying, especially in the working papers  
.
Extract # 2  
Q. (…) is it fair for the Court to understand, Mr. Rosen, that if, in fact, you've  
rejected evidence because you concluded it was not credible from your  
perspective as an accountant, you have and should advise the Court of that?  
A. I think that's just about impossibility, especially in this case, so that if it  
appears that there are two sides on an issue, clearly you would bring that out. If  
there's a situation where there are just overwhelming facts and (inaudible), and  
you're saying to yourself, yes, there could be two or three tiny things, I tend to  
just let them go because I can't see how that's going to affect the calibre of the  
financial statements and the quality of reporting in fairness.  
So there's just... this is not a single or double issue case, this is a multiple,  
multiple issues. So I think what you're asking is, I agree with in theory, but in  
practicality, it's almost impossible to achieve. You would have volumes and  
volumes and volumes in a report3  
40  
.
[
354] Rosen believes that there should be independence in the standards. He wrote  
“
The solution to this problem is to have a total independent body" and “The problem  
again comes back to the self-regulation of auditing firms in Canada”. Concluding from  
this, as the Defendants are suggesting that “Rosen is of the view that C&L is behind the  
problems with GAAP as he perceives them” and that he has a grudge against C&L that  
should negatively impact the assessment of his credibility is a step not to be taken.  
[
355] Before cross-examination started, and as he admitted under cross-examination  
on February 19, 2009, Rosen was aware of errors or corrections to be made to his 1997  
reports, volume 1 and volume 2, but errors and needed corrections were not brought to  
3
39  
40  
Rosen, February17, 2009, p.36-37  
Rosen, February 17, 2009, pp.41-42  
3
500-05-001686-946  
PAGE: 72  
3
41  
the Court’s specific attention . Rosen explained they were not significant and had no  
impact on his overall conclusions.  
No, I'm saying the overall part is, because the numbers are so huge, that it  
doesn't affect my conclusions on GAAP, GAAS and free of material  
342  
misstatements  
.
We're talking about huge huge numbers here on the losses (…), so that the  
listing of all of the mistakes, if you want to call it, that I made or misinterpretations  
that I made are still very small3  
43  
.
(
…) so that there are just many many situations where I always gave the benefit  
of the doubt to Coopers & Lybrand and so now, I find I made the inevitable  
mistakes here and there, but they don't change my overall conclusions3  
44  
.
[
356] Immediately, on February 19, 2009, concern was expressed given the read-in  
345  
rule and measures were taken to address such concern .  
[
357] The day after, on February 20, 2009, before cross-examination resumed, Rosen  
3
46  
produced two documents, PW-3033-1 and PW-3033-2, and gave further details .  
[
358] Disclosure of corrections or errors to an expert’s report is expected at the earliest  
opportunity. Absence of disclosure or delay to disclose is a factor taken into account  
when time comes to assess opinions on specific topics. However, and while disclosure  
did only happen further to questions put to Rosen in cross-examination and further to  
the Court’s intervention, the measures taken on February 19, 2009 are satisfactory  
given the limited significance of such errors and corrections and the unique  
circumstances of the present file.  
[
359] Rosen has business interest in a corporation which offers advice to end-users of  
financial statements. The outcome of the present file is of interest to him but not to the  
extent of a conflict of interest. Such interest is a factor taken into account when time  
comes to assess opinions on specific topics.  
[
360] In his report and in his testimony, Rosen stated the facts and assumptions on  
which his opinions were based and more often than not those facts and assumptions  
are found to exist or to be right, as later discussed in the present judgment.  
D efendants’ experts  
341  
342  
343  
344  
345  
346  
Rosen, February 19, 2009, pp. 239-267  
Rosen, February 19, 2009, p.239  
Rosen, February 19, 2009, p.241  
Rosen, February 19, 2009, p. 244  
Rosen, February 19, 2009, pp.251 to 268  
Rosen, February 19, 2009, pp. 51 to 65  
5
00-05-001686-946  
General comments  
361] The present case is an auditor’s negligence case. The inter-relationship between  
PAGE: 73  
[
the concepts of GAAS and GAAP is essential to the audit process.  
[
362] None of the Defendants’ experts has provided an opinion about the inter-  
relationship of GAAS and GAAP, despite being chartered accountants with audit  
experience.  
[
363] Defendants’ experts have performed restricted mandates that do limit rather than  
complete the understanding of the fundamental issues of the case. The concepts of  
GAAS and GAAP have been severed so that none proffer an opinion on the  
fundamental question in this case: did C&L conduct its 1988, 1989 and 1990 audits in  
accordance with GAAS and, if not, what were the consequences of such failure?  
[
364] None of Defendants’ experts has opined on the actual C&L’s audit of the loans  
347  
and the loan loss provisions, a fact that surprised Levi , and their various opinions  
cannot be assembled and taken as a whole.  
Selman  
[
365] Selman’s mandate was narrowly circumscribed to exclude:  
•
whether Castor’s audited consolidated financial statements were materially  
misleading or, as a whole, present fairly the financial position of Castor in  
accordance with GAAP;  
•
•
•
whether C&L conducted its audits of Castor in accordance with GAAS;  
whether C&L conducted its audit of loans in accordance with GAAP and GAAS;  
whether C&L followed proper procedures in respect of planning, supervision and  
review; and  
•
whether the staff that did the audit work on the investment section in Montreal  
3
48  
was sufficiently experienced to undertake those procedures .  
[
366] Selman’s methodology did not require that he bring to the attention of this Court  
the information that C&L should have requested from Castor.  
[
367] When he was confronted with the fact that he had given many opinions in his  
report (on numerous pages) as to information that Castor should have provided to  
3
47  
48  
Levi, February 1, 2010, pp. 32–40.  
3
Selman, May 4, 2009, pp. 125, 165-168, 186-188; May 5, 2009, pp. 40, 41; May 25, 2009, pp. 141,  
199, 226-227; May 26, 2009, pp. 22-23; June 1, 2009, pp. 96-97, 106, 109, 134.  
500-05-001686-946  
PAGE: 74  
Coopers & Lybrand and when he was asked why he did not indicate to the Court, firstly,  
what information Coopers & Lybrand should have requested from the audit client,  
3
49  
Selman answered: “I was dealing with the issue from a different point of view” .  
[368] Unlike Goodman and Levi, Selman has limited experience as an auditor.  
[
369] His experience auditing businesses similar to that of Castor was limited to a  
single client, the Bank of British Columbia, and it ended in 1981, well before the years  
3
50  
relevant to the case at bar .  
[
370] It is noteworthy that Selman is the expert mandated to opine at all on GAAS  
given his limited experience in the field, and not one of the experts with relevant  
experience as a practitioner during the period between 1987 and 1991(Goodman or  
Levi).  
[
371] In preparing his report, Selman did not consider the evidence of the C&L audit  
351  
staff members relating to the work they performed on the investment section , nor the  
differences in the way the audit was conducted in Europe as opposed to the way it was  
3
52  
conducted in Montreal .  
[
372] With Selman’s opinion, the Court has a sketchy picture of the situation. As  
Selman himself pointed out, because his work was limited to certain aspects, he was  
not in a position to deal with the question of whether or not the financial statements  
“
have been presented appropriately, and the Court will have to take my testimony, and  
later witnesses' testimony and sew it together to get to that conclusion, and that's just  
3
53  
the fact of the matter” .  
[
373] This methodology limited his analysis of the errors made by C&L while it enabled  
him to gather evidence to support C&L’s defense of “fraud against the auditors”.  
[
374] In various instances, the Court observed reluctance to answer simple and clear  
questions in a precise factual context that were put to him by Counsel or by the Court.  
From such behaviour, and on some of those specific topics, the Court draws adverse  
inferences. As an example, the Court refers to the exchange that took place on May, 21,  
2
009 during Selman’s examination in chief (on the topic of the 1988 maturity changes)  
354  
when she asked such a question and never got a direct answer .  
[
375] Acting more like a critic of the Plaintiff experts’ reports and testimonies than as  
an analyst of C&L’s work, Selman talked mainly about principles, or only about  
principles, rather than the application of same.  
349  
350  
351  
352  
353  
354  
Selman, May 26, 2009, p. 59  
Selman, May 4, 2009, pp. 114, 198-199.  
Selman, June 4, 2009, pp. 51-52.  
Selman, May 26, 2009, p. 103-104.  
Selman, June 1, 2009, p. 95.  
Selman, May 21, 2009, pp.31 -43  
5
00-05-001686-946 PAGE: 75  
Goodman  
376] Goodman has knowledge and experience that is directly applicable to this  
[
litigation.  
355  
[
377] Clearly, Goodman has substantial relevant audit experience .  
•
•
Goodman spent over 20 years of his professional career performing audits of  
large companies involved in real estate investment and development, namely  
with a real estate client whose business was very similar to that of Castor;  
Goodman joined Price Waterhouse’s Montreal office as a member of its audit  
department in 1977, and the focus of his work over the next few years was the  
audits of privately-owned commercial and real estate development companies,  
holding companies and investment holding companies;  
•
•
•
•
•
Goodman participated in the audit of a chartered bank (RBC) and was  
responsible for the analysis of the loans and the loan loss provisions;  
Goodman continued to pursue his career in audits in the 1980s by working, inter  
alia, on the audits of Alcan, both in Canada and in Europe;  
Goodman was appointed as an audit partner of Price Waterhouse in 1987 and  
focused his practice on developing a real estate audit and an advisory practice;  
In 1988, Goodman became the lead audit partner for a number of real estate  
companies;  
From 1987 to 1997, Goodman served on the Audit Committee of the Société  
d’habitation et de développement de Montréal, which held over $400 million in  
residential real estate;  
•
•
Goodman was the audit partner for the audit of Standard Life in respect of the  
mortgage loan portfolio and the real estate holdings as late as 1995;  
Goodman lectured at McGill University for the Chartered Accountants’  
programme, providing “the most advanced auditing course that's offered in the  
McGill chartered accountancy program” for which he “led the restructuring, the  
preparation, the material, the preparation of the exams, the correction of the  
exams;  
•
Goodman became the second partner on the Castor mandate in March 1996,  
and took over the lead on the file for Price Waterhouse in mid 1997.  
355  
D-1310 and Goodman, September 3, 2009, pp. 20-23, 28, 34-36, 53-55, 82, 108-110, 221-222  
500-05-001686-946  
PAGE: 76  
[
378] Goodman’s report was written from the point of view of a “hypothetical honest  
preparer of Castor's financial statements with access to all of the available information  
that WOST (Stolzenberg) permitted this individual to have as at the audit report date of  
3
56  
each the years” .  
[
379] Four inescapable remarks stem from the above:  
•
Goodman’s exercise was performed from the point of view of a person that never  
existed at Castor3  
57  
•
•
Goodman’s exercise was performed from the point of view of the audited client;  
Goodman’s exercise is reliant on his understanding (or his belief) of accessible  
available information – access being under the direct constraint of Stolzenberg;  
•
Goodman’s exercise was not performed from the point of view of an auditor who  
has to apply GAAS to figures he is provided with and who interact with numerous  
sources of information.  
[
380] Goodman’s mandate excluded any GAAP disclosure issues, any evidence as to  
the disclosure of related party transactions, disclosure of economic dependence and  
maturities in the Notes, disclosure of capitalized interest, any issues of fraud, any issues  
3
58  
of overall financial statement presentation and any issues of GAAS .  
[
381] When asked why he restricted his opinion to a non-auditor GAAP perspective,  
Goodman’s response was that he was not comfortable in dealing with audit matters,  
3
59  
and he repeatedly asserted that he was uncomfortable opining on GAAS . A  
surprising and unreliable answer in the circumstances.  
[
382] Goodman’s interest in the present litigation, ensuing from his relationship with  
Defendants, puts into question his ability to be objective and unbiased.  
360  
Goodman assumed primary responsibility for Castor’s mandate in mid 1997 ;  
•
•
•
3
61  
At that time, Goodman was a managing partner of Price Waterhouse ;  
Goodman testified that he gave his initial opinion verbally to Heenan Blaikie (that  
no loan loss provisions were necessary as at December 31, 1990 for the 5  
projects he reviewed), together with a written analysis on or about September 30,  
3
3
3
56  
57  
58  
D-1312, p.ES-1  
Goodman, October 9, 2009, pp. 134-135.  
Goodman, September 15, 2009, p. 130; October 9, 2009, pp. 83-84, 120, 133, 157; September 4,  
2009, pp.10-13.  
359  
360  
361  
Goodman, September 4, 2009, pp. 5-6; Goodman, October 9, 2009, pp. 83-84.  
Goodman, September 3, 2009, pp.54-55  
Goodman, September 3, 2009, pp.44 and followings  
500-05-001686-946  
PAGE: 77  
362  
997 during a meeting at the offices of Defendants’ counsel . There is no  
1
documentary evidence to support this testimony as Goodman’s invoices for this  
period do not indicate any preparation of a preliminary opinion or any meetings  
with counsel;3  
63  
•
•
Goodman asserted, in response to a question from Defendants’ counsel, that this  
initial opinion was communicated months prior to when he became aware of the  
possibility of the merger of Price Waterhouse and C&L which was «sometime in  
January 1998»;3  
64  
Goodman was adamant that he only learned of the possible merger in January  
1998;  
Q- And is it possible that you're confusing the timing and that in fact, this advice  
to you was given in September of nineteen ninety-seven (1997)?  
A- Oh, it's absolutely inconceivable365».  
•
As a managing partner and member of the national management committee of  
Price Waterhouse Canada, Goodman was alerted to the possibility of the merger  
3
66  
before the public announcement ;  
•
•
Contrary to Goodman’s testimony, the possibility of the merger was announced  
3
67  
throughout the media on or by September 18, 1997 ;  
Clearly, Goodman was aware of the possible merger within 2 months of  
becoming the lead partner in the Castor file and before the date that he asserted  
providing his preliminary opinion to Defendants’ counsel.  
[
383] Confronted with the evidence as to when the public announcement was made of  
the possible merger of Price Waterhouse and C&L, Goodman altered his testimony and  
stated that his opinion was provided to Defendants’ counsel prior to the announcement  
3
68  
of the merger (i.e., early in September 1997) . The Court does not find this testimony  
reliable.  
362  
363  
364  
365  
366  
367  
368  
Goodman, September 3, 2009, pp.111-113  
D-1314  
Goodman, September 3, 2009, p.127  
Goodman, September 3, 2009, p.143  
Goodman, September 3, 2009, pp.149-150  
Goodman, September 3, 2009, pp.143-152; PW-3065  
Goodman, September 3, 2009, pp. 149-150.  
500-05-001686-946  
PAGE: 78  
[
384] After the public announcement, Goodman and PriceWaterhouse agreed to  
examine additional loans and to opine on other issues, including Castor’s status as a  
3
69  
going concern and the share valuation letters .  
[
385] Assuming a certain responsibility to pursue a mandate that had started before  
merger discussions took place, why did Goodman and Price Waterhouse agree to an  
expansion of their mandate after the public announcement was made in mid September  
1
997 of the potential merger?  
[
386] Goodman asserted to the Court that he had no qualms about fulfilling his  
mandate because of the high degree of scepticism he had that the merger would  
3
70  
proceed . However, his initial report was dated May 29, 1998 (filed into the Court  
record but not produced), 9 days after the European Commission granted the approval  
3
71  
of the merger on May 20, 1998 , such an approval being considered by the firms  
themselves to be the last major obstacle to the merger of Price Waterhouse and C&L.  
[
[
387] The merger was effective as of July 1, 1998.  
388] The last question put to Goodman by Defendants’ counsel during the “voir-dire”  
was whether, as a partner in PriceWaterhouse Coopers, he had any financial interest in  
the outcome of this litigation, to which Goodman replied: «To the best of my knowledge,  
I have absolutely none. »  
[
389] When challenged on this testimony, Goodman suggested to the Court that there  
are 5,000 partners in the Canadian firm, and the international firm is much larger, so  
even if 100 of his partners were found liable, he doesn’t think that this would have a  
major impact on PriceWaterhouse Coopers. Moreover, in Goodman’s opinion, there is a  
firm culture whereby everyone would chip in if a significant number of partners were in  
3
72  
trouble .  
[
390] Goodman admitted that, as managing partner, he was served with the  
proceedings taken by the Trustee in Bankruptcy for Castor against Pricewaterhouse  
Coopers relating to the assets that PriceWaterhouse Coopers acquired from C&L and  
seeking an order of the Court that in the event that the plaintiffs prevail in their actions,  
3
73  
that they could look to those assets for recovery .  
[
391] It is not believable that Goodman would assume that he has and had no  
economic interest in the outcome of the present litigation either directly as a partner of  
PriceWaterhouse Coopers or indirectly because of the potential liability of a number of  
his partners.  
369  
370  
371  
372  
373  
Goodman, September 3, 2009, pp. 112–117; D-1312, p. 1.  
Goodman, September 3, 2009, pp. 127–128.  
PW-3068; PW-3069.  
Goodman, September 3, 2009, pp. 192–193, 200-201.  
PW-3071  
500-05-001686-946  
PAGE: 79  
[
392] In assessing the carrying value of the loans and the requirement for loan loss  
3
74  
provisions, he did not consider whether the borrowers were related to Castor , and he  
3
75  
did not look for or consider the existence of fraud .  
393] He admitted that he intentionally disregarded evidence that would have allowed  
[
him to opine on C&L’s analysis of audit evidence and their conclusions as to GAAP or  
3
76  
GAAS . In a case dealing with alleged auditor’s negligence, it is revealing that  
Goodman deliberately avoided examining evidence as to whether C&L had obtained  
3
77  
sufficient information to address adjustments to Castor’s financial statements .  
[
394] Confronted at trial with a C&L statement appearing in the AWPs, and reproduced  
as a value indicator in his report, Goodman refused to acknowledge that it indicated  
3
78  
what C&L knew at the time .  
[
395] Goodman was also inconsistent in his methodology, insisting that documents  
379  
that do not support his view) are less relevant because they are unsigned , but  
(
stating that this Court should still give weight to unsigned documents cited by him in  
3
80  
support of his own views .  
396] Goodman’s opinions are predicated on his determination of the credibility of  
[
3
81  
witnesses, a situation he acknowledged: “The opinion I'm giving is based upon the  
3
82  
facts that I saw, My Lady, and my assessment of the facts” . If this Court does not  
share Goodman’s views on the credibility of witnesses, his opinion could become moot  
for that reason alone.  
Levi  
[397] Levi has knowledge and experience that is directly applicable to this litigation.  
•
•
Levi obtained his CA designation in 1971 and, as mentioned in his curriculum  
vitae, he has “extensive expertise and experience over the past 39 years in  
3
83  
GAAS and GAAP in Canada” .  
During the years 1975 to 2004, Levi was the senior partner responsible for his  
firm’s standards and quality control with the mandate “to review and establish  
procedures, forms and staff training.”  
374  
375  
376  
377  
378  
379  
380  
381  
382  
383  
Goodman, October 9, 2009, pp. 116-128.  
Goodman, October 9, 2009, p. 157  
Goodman, November 23, 2009, pp. 24-25.  
Goodman, November 23, 2009, pp. 26-27.  
Goodman, November 24, 2009, pp. 168-169. See also D-1312, p. 496.  
See, for example, the appraisal PW-1108B.  
Goodman, November 3, 2009, pp. 25-26.  
See for example : Goodman, October 9, 2009, pp. 213-217.  
Goodman, October 9, 2009, p 159  
D-1346  
500-05-001686-946  
PAGE: 80  
[
398] Although he clearly had relevant experience and knowledge on the issues of  
GAAP and GAAS, Levi’s mandate excluded whether there was a failure of GAAS,  
including whether C&L obtained sufficient appropriate audit evidence (“SAAE”), any  
issues related to GAAP and loan loss provisions, including whether the loans were in  
3
84  
default or whether there was a valuation issue .  
[
399] As Levi explains, somebody made a determination, before he got involved, that  
Defendants had to partition the work between experts given the magnitude of the case,  
3
85  
the magnitude of documentation and the magnitude of issues .  
400] Levi’s mandate was restricted to identifying areas of fraud that he could detect  
[
and to analyze which of those would or could have impacted on the auditors’ ability to  
3
86  
do their audit in accordance with GAAS .  
3
87  
[
401] Partition is not a prerogative of the Court: all pieces have to be linked together .  
402] Usefulness of Levi’s opinion is thus limited since:  
[
•
•
•
It is focused on fraud detection;  
It does not address GAAP and GAAS compliance by the auditors;  
It is entirely dependent on Levi’s reading of certain facts and certain facts  
only.  
[
403] On page 2 of his report, at item 8 of his summary of conclusion and opinion, Levi  
writes “Considering the extent of the fraud, the elaborate and widespread management  
collusion, the outside collusion and the intentional deception and misrepresentations  
made by Wolfgang Stolzenberg and his co-conspirators to the auditors, it is my opinion  
that it was not possible for Coopers & Lybrand to have detected the fraud during the  
performance of their year-end audits in accordance with Generally Accepted Auditing  
3
88  
Standards for 1988-1990” . The central issue of Levi’s report is fraud detection -  
whether C&L could or could not have detected the full spectrum of the alleged fraud.  
[
404] The main issue in the present file is not fraud detection – the Court is not asked  
to determine whether C&L could or could not have detected the full spectrum of an  
alleged fraud: C&L are not sued because they would have failed to detect fraud.  
[
405] The Court has to decide if C&L did their work in accordance with GAAP and  
GAAS.  
3
84  
Levi, January 11, 2010, pp. 63-64, 76-77, 134, 164-166; January 27, 2010, p. 207; January 29, 2010,  
pp. 118–119.  
385  
386  
387  
388  
Levi, January 29, 2010, p.122  
Levi, January 29, 2010, p. 123.  
Levi, January 29, 2010, p.123  
D-1347, p.3  
500-05-001686-946  
PAGE: 81  
[
406] If the Court concludes that C&L did not comply with GAAP and GAAS, the  
following question is whether C&L would have been in a position to sign a similar  
unqualified audit opinion in 1988, 1989 and 1990, had they complied with GAAP and  
GAAS.  
[
407] The mandate requested of Levi to identify signs of an alleged fraud on the  
auditors, without any consideration of the audit work performed, is a hollow exercise.  
How can someone conclude that it was impossible for the auditor to have detected  
material misstatements, without considering what GAAS required the auditor to do, and  
then assessing whether such auditor complied with the requisite standards?  
[
408] Levi stated that, in performing his mandate in the Castor file, he complied with  
Standard Practices for Investigative and Forensic Accounting Engagements”, which  
required him to “identify, analyze, assess and compare all relevant information” and  
“
389  
develop and test, as needed, hypotheses for the purpose of evaluating the issues .  
“
However, in cross-examination, he admitted that he had not complied as he was  
confronted with the situation where he had failed to identify, analyze, assess and  
3
90  
compare all relevant information and test alternative hypotheses .  
[
409] Levi reviewed the testimony that was provided to him; he did not review all of the  
391  
testimony .  
[
410] Although Levi asserted that his mandate excluded a determination as to whether  
C&L obtained sufficient appropriate audit evidence (“SAAE”) and generally complied  
3
92  
with GAAS , he opined in his report: «I have examined the working paper files  
prepared by Coopers & Lybrand for the audits of the Castor Holdings Ltd. group of  
companies for the years 1988 to 1990 and have not found any failures in their  
application of generally accepted auditing standards which could have resulted in the  
auditor's failure to detect the fraudulent activities which occurred at Castor Holdings Ltd.  
3
93  
as described herein» .  
[
411] His opinions were tainted at the outset by his assumption that C&L would not  
have made errors. By way of example, he relied on notations in the AWPs to attack the  
integrity of underlying documents, asserting that it was not plausible that the notations  
3
94  
could be consistently erroneous . After being confronted with evidence in cross-  
examination as to the fallacy of his assumption, Levi was forced to acknowledge the  
audit errors, but then reversed his position and began to defend them as being allegedly  
3
95  
commonplace .  
389  
390  
391  
392  
393  
394  
395  
D-1313, p. 9, paras 400.04 and .05; Levi, January 12, 2010, pp. 66-68.  
Levi, January 28, 2010, pp. 65-69; February 3, 2010, pp. 125-126.  
Levi, February 3, 2010, pp. 80-82.  
Levi, January 11, 2010, pp. 64-66.  
D-1347, p. 31.  
Levi, January 28, 2010, pp. 118-120, 130.  
Levi, January 28, 2010, pp. 199-208.  
500-05-001686-946  
PAGE: 82  
[
412] Levi admitted that he did not know if the Matters for attention of partners  
(
“MAPs”) brought forward the points that should have been brought forward to the  
396  
partner . He assumed that if Wightman was presented with a document that he felt  
3
97  
was incomplete or inaccurate, he would have required it to be corrected .  
413] He initially suggested to this Court that Wightman reviewed the working paper  
[
files before meeting with Stolzenberg for the year-end wrap-up, but he then admitted  
3
98  
that he did not verify the testimony of Wightman to ascertain if that was true . As a  
3
99  
matter of fact, Wightman did not review the working paper files .  
[
414] Levi opined as he did by taking for granted that C&L audits in 1988, 1989 and  
1
990 had been performed as “a normal financial audit applying GAAS”.  
[
415] Levi became an advocate for Defendants by assuming fraud and a deception on  
the auditors. He identified in his report and testimony what he deemed to be indicia of  
fraud without considering the evidence suggesting an alternative explanation, the  
underlying transaction, the nature of the audit work performed or the books and records.  
[
416] If one looks at the evidence for the sole purpose of identifying indicia of fraud,  
there is a risk of misinterpreting facts and distorting reality. In fact, Levi’s own invoices  
could be characterized as forgeries if one applied his methodology. Plaintiff’s counsel  
was provided one version of these invoices in response to a subpoena duces tecum,  
4
00  
contained different information. There was  
but the version produced into the record  
neither fraud nor any intention to mislead but if one looks at these documents the way  
that Levi approached the Castor mandate, one would or could talk of “false documents”  
and the fact that legal counsel was involved in the communication of the documents  
4
01  
could or would suggest a conspiracy to deceive .  
Are the audited consolidated financial statements of  
Castor for 1988, 1989 and 1990 materially  
misstated and misleading?  
Conclusion  
[
417] The audited consolidated financial statements of Castor for 1988, 1989 and 1990  
are materially misstated and misleading.  
396  
397  
398  
399  
400  
401  
Levi, February 2, 2010, pp. 63-64  
Levi, February 2, 2010, pp. 64-65.  
Levi, February 1, 2010, pp. 133-134, 189.  
Wightman, February 11, 2010, pp.73-74  
PW-3096.  
Levi, February 3, 2010, pp. 196-205.  
500-05-001686-946  
PAGE: 83  
[
418] The Auditors’ Reports, issued by C&L on the consolidated financial statements of  
Castor for the years ended December 31, 1988, 1989 and 1990, state that the financial  
statements present fairly, in all material respects, the financial position of Castor as at  
December 31, and the results of its operations and changes in its net invested assets,  
4
02  
for the year then ended, in accordance with GAAP .  
[
419] The 1988, 1989 and 1990 audited consolidated financial statements do not  
present fairly, in all material respect, and in accordance to GAAP, the financial situation  
of Castor namely because of (pursuant to) the:  
•
Absence of a Statement of Changes in Financial Position showing the sources  
and uses of cash and cash equivalents;  
•
•
•
•
Undisclosed related party transactions;  
Artificial improvements of liquidity and undisclosed restricted cash;  
Undisclosed Capitalised interests and inappropriate revenue recognition;  
Understatement of Loan loss provisions and overstatement of carrying value of  
Castor’s loan portfolio and equity;  
•
The reality of diversion of fees.  
[
420] «The reports of the auditors were absolutely clean, as clean as white snow in  
403  
Montreal five minutes after it snowed» . The trends in financial performance with  
respect to revenue, net earnings, retained earnings, assets/liabilities, capital stock as  
well as shareholders’ equity, evident from Castor’s audited consolidated financial  
4
04  
statements , “portrayed an uninterrupted pattern of yearly improvement and success  
4
05  
406  
in all those categories” . These financial trends were described as “outstanding” ,  
407 408 409  
highly impressive” , “spectacular” , and even “magnifique” .  
“
[
421] In reality, things were otherwise.  
[
422] The presentations, disclosures and omissions of disclosure combined and  
complemented each other to effectively conceal the fact that Castor’s operations were  
not generating cash but rather draining the cash resources of the company, a vital fact  
that could not be ascertained from the financial statements.  
402  
403  
404  
405  
406  
407  
408  
409  
PW-5 (tab 10, 11 and 12)  
Jarislowsky, April 4, 2005, p. 323  
Respectively, PW-2888, PW-2889, PW-2890, PW-2891 and PW-2892, all based on data from PW-5-1  
PW-2908, Vol. 1, p. S-4, S-16 and S-17.  
Lowenstein, March 21, 2005, p.137  
Morrison, October 10, 2006, pp. 218-220, at p. 220; October 11, 2006, pp. 9-21, at pp. 12, 16.  
PW-2405, pp. 6-7.  
Lajoie, November 19, 2009, pp. 128-131, at p. 131. See also Jarislowsky, April 4, 2005, p.39  
500-05-001686-946  
PAGE: 84  
General state of affairs – 1988, 1989 and 1990  
L oan portfolio  
[
423] Castor’s investment portfolio was comprised of two parts: the “relationship” loans  
which comprised 95% of the portfolio and the “third party” loans which comprised the  
remaining 5%. The relationship loans included the loans to the YH group, the loans  
connected to the three Skyline hotels, the loans to the MLV project, the loans connected  
to the MEC project, the loans to the DT Smith group and the loans to the Wost group.  
L oan commitment and renewal letters - covenants  
[
424] Castor’s loan commitment and renewal letters generally followed a consistent  
pattern in respect of loan covenants. Borrowers were requested to:  
•
•
Pay monthly or quarterly the interests;  
Pay the commitment or renewal fees at the time of the making or the annual  
renewal of a loan;  
•
•
•
Provide audited or unaudited financial statements regularly;  
Provide legal opinions confirming the validity and enforceability of security; and,  
Provide financial information related to the status and progress of the project, in  
the case of actual construction loans.  
[
425] Castor’s borrowers were breaching these loan covenants, both before and during  
988 to 1990.  
1
[
426] Looking at YH group, DT Smith, MEC, MLV, TSH, CSH, OSH, TWTC and  
Meadowlark loans, there is not one single instance where the borrowers complied with  
all of their loan covenants. As a matter of fact, in most of the cases, the borrowers did  
not comply with any of their covenants.  
[
427] For 1988, 1989 and 1990, the YH borrowers did not and could not provide Castor  
with audited financial statements.  
[
428] Furthermore, in respect of the various real estate projects, borrowers were in  
default of their obligations to make payments of taxes as well as payments to prior  
ranking secured lenders or co-owners.  
[
429] The failure of Castor’s borrowers to respect their covenants was documented in  
hundreds of memos in Castor’s loan files and in Castor’s books and records.  
500-05-001686-946  
PAGE: 85  
S ecurity profile  
[
430] There was a marked shift in Castor’s security profile over the 1980s.  
431] In its promotional materials published annually, Castor stood out as a lender  
[
whose preferred investments were first and second mortgage interim loans on income  
4
10  
producing properties . However, by 1988, loans secured by mortgages represented  
less than 50% of Castor’s portfolio and, in each subsequent year, such loans  
4
11  
represented an increasingly smaller percentage of Castor’s total portfolio .  
[
432] By 1986, Castor had run out of YH projects on which to re-allocate the ever  
412  
increasing (snowballing ) year-end YH indebtedness and, consequently, was obliged  
to commence making equity loans to parent and grand-parent companies.  
S tate of projects  
[
433] With respect to Castor’s loans connected to the various hotels (the Skyline hotels  
and the MLV hotels):  
•
•
The operations were in deficit and operators incapable of meeting their  
obligations ( MLV - non-payment of taxes, OSH - non-payment of rent and TSH -  
4
13  
non-payment of taxes) ; and  
Each property required renovations, but as financing to carry them out could not  
be raised or was misappropriated for other purposes, the project’s losses  
continued to increase.  
[
434] Castor’s development loans to the DT Smith group were characterized by delays  
and cost overruns.  
F inancial situation of borrowers  
[
435] The YH group and the DT Smith group were financially dependent on Castor for  
414  
their liquidity needs . It was unrealistic to expect anything but capitalized interest  
4
15  
revenue on their loans .  
[
436] During the 1988 to 1990 period, and absent Castor’s ongoing life support,  
Castor’s principal borrowers were not financially viable:  
4
4
4
10  
11  
12  
E.g. PW-1057-1, PW-1057-2 and PW-1057-3  
PW-2893-24; Ron Smith, May 14, 2008, pp. 63-64  
Vance, April 9, 2008, p. 178; R. Smith, September 3, 2008, pp. 88-89, R. Smith, October 2, 2008, p.  
62.  
413  
414  
415  
Prychidny, October 14, 2008, pp. 44-48  
D-1324  
D-1324  
500-05-001686-946  
PAGE: 86  
•
•
•
YH group of companies were likely insolvent in that they could not pay their  
liabilities in the normal course of business without Castor’s continuous financial  
support 4  
16  
;
the Wost group of companies relied on funds received by Castor to pay liabilities  
in the normal course of business as they generated no cash or very little cash  
4
17  
from their own operations ; and  
the DT Smith companies were totally dependent on Castor for their liquidity  
needs. 4  
18  
[
437] By 1988, Castor was financing unpaid taxes, project deficits and other operating  
expenses of the properties in order to avoid foreclosure by prior ranking lenders or sales  
4
19  
for taxes .  
4
20  
[
438] The YH borrowers were insolvent during 1988, 1989 and 1990 . In December  
421  
1
989, documents were shown by YH to Castor evidencing such insolvency . YH  
management threatened to resign en masse unless Castor agreed to fund YH’s  
4
22  
operating requirements .  
439] Castor was “trapped” and had no choice but to keep tolerating YH’s defaults: YH  
[
could not survive without Castor’s support and the failure of YH would lead to the  
4
23  
demise of Castor .  
Capitalized interest and fee income  
[
440] For 1988, 1989 and 1990, and based on a sample of more than 60% (average  
4.05%) of Castor’s investment portfolio, the minimum amount of capitalized interest  
and fee income was:  
6
o 1988: 92.4% or $79.3 million;  
o 1989: 96.9% or $121.1 million;  
o 1990: 96.2% or $159.7 million 424.  
4
4
4
4
4
16  
17  
18  
19  
20  
D-1312, ES-25 (Goodman’s report)  
See Books and records of the Wost group  
D-1324  
PW-167  
R. Smith, May 14, 2008, p. 183; PW-1153; Prychidny, October 14, 2008, pp. 83-85; D-1312, ES-25,  
1
54; Whiting, February 22, 2000, pp. 67, 70-79; May 9, 2000, p. 54.  
421  
422  
423  
PW-1149; PW-499C-1; PW-1153; Whiting, November 17, 1999, pp. 93-103.  
Quigley, March 15, 2010, pp. 213-214; March 16, 2010, pp. 63-64  
R. Smith, May 14, 2008, pp. 139-140, 175; September 3, 2008, pp. 50-51; September 15, 2008, pp.  
1
38-139  
500-05-001686-946  
PAGE: 87  
[
441] Very little of Castor’s revenue was collected in cash. 425  
[
442] Virtually 100% of the interest recognized by Castor on YH loans was either  
426  
The  
capitalized to new or existing loans or paid through cash circles at year-end.  
same pattern was prevalent in respect of the loans to the three Skyline Hotels, MLV,  
4
27  
MEC, Meadowlark and DT Smith.  
L oan loss provisions  
[
443] Until 1988, Castor had no policies on loan loss provisions and, in fact, never took  
428  
a provision prior to that year .  
4
29  
Applicable GAAP rules (in a nutshell)  
N ature and sources of G A A P  
[
444] GAAP are promulgated by the Canadian Institute of Chartered Accountants  
(
“CICA”) through published reports, including “recommendations with respect to matters  
of accounting practice”. These recommendations are contained in the CICA Handbook  
and are revised and updated periodically.  
[
445] GAAP is the term used to describe the basis on which financial statements are  
430  
normally prepared .  
[
446] No rule of general application can be phrased to suit all circumstances or  
combination of circumstances that may arise, nor is there any substitute for the exercise  
of professional judgment in the determination of what constitutes fair presentation or  
good practice in a particular case.  
[
447] The term GAAP encompasses not only specific rules, practices and procedures  
relating to particular circumstances but also broad principles and conventions of general  
application, including underlying concepts described in section 1000 of the Handbook.  
424  
425  
426  
427  
428  
429  
430  
PW-1485R  
Tooke, February 27, 2008, pp. 98-99; PW-98 A, PW-98 B, PW-98 C and PW-98 D  
PW-1056 F; R. Smith, May 14, 2008, pp. 138-139.  
PW-167 and PW-2908  
Ron Smith May 14, 2008, pp. 121-126.  
PW-1419-1 (1988), PW-1419-2 (1989) and PW-1419-3 (1990)  
PW-1419-2,1000.48  
500-05-001686-946  
PAGE: 88  
[
448] Most sections of the Handbook contain discussions and prescriptive statements.  
When a paragraph is italicized, the paragraph is determinative of the issue the section is  
addressing - as an Accounting Recommendation.  
[
449] Specifically, GAAP comprise the Accounting Recommendations in the Handbook  
and, when a matter is not covered by a Recommendation, other accounting principles:  
a) generally accepted by virtue of their use in similar circumstances by a significant  
number of entities in Canada; or  
b) consistent with the Recommendations in the Handbook and developed through  
4
31  
the exercise of professional judgment .  
[
450] In those rare circumstances where following a Recommendation would result in  
4
32  
misleading financial statements, GAAP encompass appropriate alternative principles .  
Other F inancial statements concepts (section 1000)  
[
451] Financial statements are designed to meet the common information needs of  
433  
external users of financial information about an entity.  
[
452] Financial statements normally include a balance sheet, income statement,  
statement of retained earnings and statement of changes in financial position. Notes to  
financial statements and supporting schedules to which the financial statements are  
4
34  
cross-referenced are an integral part of such statements.  
[
453] The content of financial statements is usually limited to financial information  
about transactions and events. Although they often require estimates to be made in  
anticipation of future transactions and events, and include measurements that may, by  
their nature, be approximations, financial statements are based on representations of  
4
35  
the past, rather than future, transactions and events.  
[
454] The objective of financial statements focuses primarily on information needs of  
436  
investors and creditors but the benefits expected to arise from providing information  
4
37  
in financial statements should exceed the cost of doing so.  
431  
432  
433  
434  
435  
436  
PW-1419-1,1000.49  
PW-1419-1,1000.50  
PW-1419-1,1000.01  
PW-1419-1,1000.04  
PW-1419-1,1000.05  
PW-1419-1,1000.09  
500-05-001686-946 PAGE: 89  
[
455] Investors and creditors, for the purpose of making resource allocation decisions,  
are interested in predicting the ability of an entity to earn income and generate cash  
4
38  
flows in the future to meet its obligations and to generate a return on investment.  
[
456] As a general rule, materiality should be judged in relation to the significance of  
financial statement information to decision makers. An item of information, or an  
aggregate of items, should be deemed material if it is probable that its omission or  
4
39  
misstatement would influence or change a decision .  
[
457] Qualitative characteristics define and describe the attributes of information  
provided in financial statements that make that information useful to investors, creditors  
and other users. The four principal qualitative characteristics are understandability,  
4
40  
relevance, reliability and comparability .  
[
458] Although information provided in financial statements will not normally be a  
prediction in itself, it may be useful in making predictions. The predictive value of the  
income statement, for example, is enhanced if abnormal items are separately  
4
41  
disclosed .  
[
459] For the information provided in financial statements to be useful, it must be  
442  
reliable .  
[
460] Financial statements are prepared on the assumption that the entity is a going  
concern – it will continue in operation for the foreseeable future and will be able to  
4
43  
realize assets and discharge liabilities in the normal course of operations.  
G eneral standards of financial presentation (section 1500)  
[
461] “Any information required for fair presentation of financial position, results of  
operations, or changes in financial position, should be presented in the financial  
statements including notes to such statements and supporting schedules to which the  
4
44  
financial statements are cross-referenced” .  
[
462] Financial reporting is essentially a process of communication. The extent of  
disclosure has an impact on the success of such communication.  
437  
438  
439  
440  
441  
442  
443  
444  
PW-1419-1,1000.13  
PW-1419-1,1000.10  
PW-1419-1,1000.14  
PW-1419-1,1000.15  
PW-1419-1,1000.17  
PW-1419-1,1000.18  
PW-1419-1,1000.47  
PW-1419-1,1500.05  
500-05-001686-946  
PAGE: 90  
[
463] Decisions as to disclosure require the exercise of sound judgment445  
.
D isclosure of accounting policies (section 1505)  
[
464] “A clear and concise description of the significant accounting policies of an  
446  
enterprise should be included as an integral part“ .  
[
465] The usefulness of the financial statements is enhanced by the disclosure of the  
accounting policies.  
S tatement of changes in financial position (section 1540)  
[466] The objectives of the statement of changes in financial position (“SCFP”) are:  
•
To provide information about the various activities of the enterprise (operating,  
financing, investing) and their effect on cash resources;  
•
•
To assist the user in evaluating the liquidity and solvency of the enterprise;  
To assist the user in assessing the ability of the enterprise:  
o to generate cash from internal sources;  
o to repay debt obligations;  
o to reinvest; and  
4
47  
o to make distributions to owners .  
467] The SCFP focuses on cash and cash equivalents – liquid financial resources  
[
readily available.  
[
468] “The SCFP should report the changes in cash and cash equivalents resulting  
448  
from the activities of the enterprise during the period” .  
A ccounts and N otes receivables (S ection 3020)  
[
469] “An account or note receivable should be written-off as soon as it is known to be  
449  
uncollectible” .  
445  
446  
447  
448  
449  
PW-1419-1,1500.02  
PW-1419-1,1505.04  
PW-1419-1, 1540.01  
PW-1419-1, 1540.04  
PW-1419-1, 3020.10  
500-05-001686-946  
PAGE: 91  
[
470] “An account or note receivable should be written down to its estimated realizable  
450  
value as soon as it is known that it is not collectible in full” .  
R evenue (section 3400)  
[
471] The amount of revenue generated by an enterprise is an important indicator of  
451  
the level of the activity of the enterprise .  
[
472] Revenue should be recognized when the requirements related to performance as  
set out in sections 3400.07 or 3400.08 of the Handbook are satisfied, provided that  
ultimate collection is reasonably assured at the time of performance.  
S ubsequent events (section 3820)  
[
473] Subsequent events can provide evidence relating to conditions that existed at the  
financial statement date or can be indicative of conditions which arose subsequent to  
4
52  
that date .  
474] “Financial statements should be adjusted when events occurring between the  
[
date of the financial statements and the date of their completion provide additional  
4
53  
evidence relating to conditions that existed at the date of the financial statements” .  
[
475] “Financial statements should not be adjusted for, but disclosure should be made  
of, those events occurring between the date of the financial statements and the date of  
their completion that do not relate to conditions that existed at the date of the financial  
statements but (a) cause significant changes to assets or liabilities in the subsequent  
period; or (b) will, or may, have a significant effect on the future operations of the  
4
54  
enterprise” .  
R elated party transactions and economic dependence (section 3840)  
[
476] Parties are considered to be related when one party has the ability to exercise  
control or significant influence, directly or indirectly, over the operating and financial  
4
55  
decisions of the other .  
[
477] Two or more parties are also considered related when they are subject to  
4
56  
common control or significant influence .  
450  
451  
452  
453  
454  
455  
456  
PW-1419-1, 3020.10  
PW-1419-1, 3400.20  
PW-1419-1, 3820.03  
PW-1419-1, 3820.06  
PW-1419-1, 3820.10  
PW-1419-1, 3840.03  
PW-1419-1, 3840.03  
500-05-001686-946  
PAGE: 92  
[
478] “When a reporting entity has participated in transactions with related parties  
4
57  
during a financial reporting period, disclosure should be made” .  
479] “When the ongoing operations of a reporting entity depend on a significant  
[
volume of business with another party, the economic dependence on that party should  
4
58  
.
be disclosed and explained”  
I nterests Capitalized (section 3850)  
459  
480] “The amount of interest capitalized in the period should be disclosed” .  
[
The 1988 audited financial statements  
Some Figures and notes content of the 1988 statements  
[481] According to its balance sheet, Castor had:  
•
1 005 992$ of investments in mortgages, secured debentures and advances  
more fully disclosed in notes 2, 3, 4 and 10;  
•
100 000$ of liabilities through debentures, more fully disclosed in note 6.  
[
482] According to the consolidated net earnings statement, Castor’s revenues for  
988 were of 132 410 000$, more fully disclosed in note 9, and Castor’s net earnings  
for 1988 were 22, 236 000$.  
1
[483] According to note 10 on related party transactions:  
•
secured debentures and advances due from shareholders in the amount of 7  
016,728$ were included in investments in mortgages, secured debentures and  
advances; and  
457  
458  
459  
PW-1419-1, 3840.10  
PW-1419-1, 3840.18  
PW-1419-1, 3850.03  
500-05-001686-946  
PAGE: 93  
•
transactions during the year, and amounts due to or from shareholders and  
directors not otherwise disclosed separately in the financial statements, were as  
follows:  
o accrued interests and other payables : 1,187 000$  
o interest revenue : 611 000$  
o other expenses: 333 000$  
[
484] Notes 2, 3, 4, 6 and 9 read as follows:  
2.  
Investments in mortgages, secured debentures and advances  
The investments in mortgages, secured debentures and advances are in various currencies and bear  
interest at varying rates from 6% to Canadian bank prime rate plus 6% per annum and mature as follows:  
(thousands of Canadian dollars)  
1989  
1990  
1991  
1992  
1993  
1994  
1998  
2005  
712,455  
94,995  
50,667  
10,172  
133,508  
3,806  
358  
31  
_
_______________  
1,005,992  
3
.
Notes payable  
a) These notes are payable in various currencies and bear interest at varying rates from 4% to 12. 5%  
and mature as follows:  
(
TOTAL  
1989  
1990  
1991  
1998  
500-05-001686-946  
PAGE: 94  
(
thousands of Canadian dollars)  
SECURED  
UNSECURED  
173,040  
268,196  
————  
—
130,540  
241,294  
—————  
———  
42,500  
25,846  
—————  
—-  
-
698  
—————  
—-  
-
358  
—————  
—
—
4
41,236  
371,834  
68,346  
698  
358  
(
b) Mortgages having an approximate book value of $172,176,000 have been pledged as security for the  
secured notes payable.  
4
.
Bank Loans and advances  
(a) Bank loans and advances are classified as follows:  
1
988  
1987  
7,400  
(
thousands of Canadian dollars)  
-
Demand loans and  
advances bearing interest  
at floating rates  
Term loans and advances  
bearing interest at floating  
rates and varying fixed  
rates from 4.125% to  
376,531  
281,731  
12.625% per annum  
—
—————————  
-
—————————  
289,131  
3
76,531  
(
(
b) The term loans and advances mature as follows:  
1
989  
1990  
1991  
1993  
(
thousands of Canadian dollars)  
35,822 20,310  
2
96,537  
23,862  
c) Mortgages having an approximate book value of $143,953,000 have been pledged as security  
for the bank loans totalling $141,609,000..  
6.  
Debentures  
500-05-001686-946  
PAGE: 95  
1
988  
1987  
(
thousands of Canadian dollars)  
50,000  
(
1
a) Debentures maturing on June 30,  
997 bearing interest at The Royal  
Bank of Canada prime rate plus 2  
% but not less than a minimum of  
1% per annum. After June 30, 1992,  
50,000  
¼
1
the company has the right to prepay  
the principal amount. Interest on the  
debentures is payable semi-annually.  
(
2
b) Debentures maturing on June 30,  
002 bearing interest at The Royal  
Bank of Canada prime rate plus 2  
50,000  
50,000  
3
1
/8% but not less than a minimum of  
1% per annum. After June 30, 1994,  
the company has the right to prepay  
the principal amount. Interest on the  
debentures is payable semi-annually.  
—
—————————  
———————————-  
100,000  
—
—
1
00,000  
9.  
Revenue  
Details of revenue are as follows:  
1
988  
$
1987  
$
(
thousands of Canadian dollars)  
Interest and discounts  
Commissions  
Share of revenue from investments  
and joint ventures  
117,366  
14,689  
355  
89,298  
8,817  
281  
—
—————————  
—-  
32,410  
———————————  
98,396  
—
1
Materially misstated (1988)  
[485] The 1988 audited financial statements were materially misstated.  
Absence of a Statement of Changes in Financial Position showing the  
sources and uses of cash and cash equivalents  
5
00-05-001686-946  
Historical information  
486] Since its inception and until 1985, Castor had used a Statement of Changes in  
PAGE: 96  
[
4
60  
Net Investment Assets (“SCNIA”) .  
[487] This early format of the SCNIA referred to “proceeds” from bank loans, notes  
payable, advances from shareholders, and other items, and to “receipt of payments of  
matured portion of mortgages, secured debentures and advances”. Accordingly, the  
reader could see what payments were made by Castor’s borrowers during the year on  
account of the matured portion of mortgages, secured debentures and advances.  
Similarly, the statement reflected “payments” made by Castor to its own lenders of  
notes payable and bank loans.  
[
488] Until 1985, the user of Castor’s financial statements could see what portion of the  
461  
investments maturing in the following year was, in fact, repaid .  
•
The user of these financial statements could see that the investments maturing in  
the following year were, in fact, repaid up to 1982.  
•
One-third of the portion of matured investments was repaid by borrowers during  
1
983 and less than 15% during 1984.  
[
489] As an example, the SCNIA for the year ended December 31, 1984 showed the  
following:  
1984  
1983  
NET ASSETS AVAILABLE FOR INVESTMENT  
Provided from operations  
9,087  
229,796  
48,185  
2,183  
7,467  
176,376  
18,597  
(1,494)  
11,173  
4,979  
Proceeds from notes payable  
Proceeds from bank loans and advances  
Increase in other liabilities  
Proceeds from loans and advances from shareholders  
Proceeds from issue of capital stock  
Receipt of payments of matured portion of mortgages, secured  
debentures and advances  
19,924  
3,726  
25,340  
43,531  
Disposal of marketable securities  
——  
——  
863  
2,857  
Disposal of income producing property  
_
________  
_________  
3
38,241  
264,349  
LESS:  
Payment of notes payable  
Payment of bank loans  
150,244  
20,012  
——  
113,841  
3,205  
Payment of 12% mortgage  
Payment of loans and advances from shareholders  
2,064  
12,213  
12,174  
4
60  
61  
PW-5-1  
4
PW-2908, Vol. 1, p. 4-C-6 and 4-C-7.; Vance, March 10, 2008, pp. 123 and following; Rosen, February  
3, 2009, pp.42 and following.  
500-05-001686-946  
PAGE: 97  
Redemption of Class "A" pref. shares  
Redemption of Class "B" pref. shares  
Redemption of Class "A" com. shares  
Redemption of Class "B" com. shares  
Dividends paid  
263  
——  
190  
83  
473  
302  
4
——  
5,809  
3,556  
102  
Increase in other assets  
22,631  
________  
_
_________  
1
26,596  
128,828  
NET ASSETS INVESTED AS FOLLOWS  
Purchase of mortgages, secured debentures and advances  
Investment in joint ventures  
125,471  
1,125  
126,330  
2,498  
_
______  
_______  
128,828  
126,596  
[
490] Therefore, this early format of the SCNIA purported to disclose, in part, cash  
inflows and cash outflows.  
[
491] In 1985, the disclosure requirements for a Statement of Changes were amended  
to require that this financial statement report the changes in cash and cash equivalents,  
in order to provide a better indication of the liquidity and solvency of an enterprise as  
well as its ability to generate cash resources. These amendments came into effect in  
October of 1985.  
[
492] Section 1540 of the CICA Handbook required that the Statement of Changes in  
Financial Position (“SCFP”) show sources and uses of cash from operations as well as  
from financing and investing activities.  
[
493] As Grezlak testified, “the change took focus away from working capital and put it  
462  
to cash” .  
[
494] The use of a SCFP in Castor’s financial statements would not have provided  
4
63  
misleading information, a fact Wightman acknowledged .  
[
495] Two statements of changes were prepared prior to the wrap up meeting by  
4
64  
Grzelak , a SCFP and a SCNIA, and both were presented to Stolzenberg.  
[
[
496] What happened next?  
497] Wightman’s descriptions of the events vary significantly. In 1996, he had no  
precise recollection. In 2010, in direct examination, he came up with very specific and  
“
self-serving” information. In cross-examination, when asked to explain what had  
triggered his memory, 14 years later, Wightman gave explanations but he could not  
support them with the specific references when challenged to do so. This is one of  
462  
463  
464  
Grezlak, October 21, 1996, p.111 Q. 414  
Wightman, March 11, 2010, pp. 64-65  
Grezlak, October 21, 1996, pp. 115-116  
500-05-001686-946  
PAGE: 98  
4
65  
: no  
many situations where all of a sudden Wightman’s memory has “improved”  
credibility is attached to Wightman’s recollection at trial.  
•
Wightman said during discovery in 1996:  
Q-And did you understand or do you understand from reading this that Mr. Clark  
apparently wants to know whether a format using cash should be employed?  
A- I think that he was asking the question, yes.  
Q- Did in fact you review this matter with Mr. Grzelak?  
A- I can't remember, I might have reviewed it with Steve Clark, but I don't  
remember that either. I explained to you before I didn't recall specifically. On the  
other hand, Mr. Clark may have reviewed it with Mr. Grzelak and not with me, I  
don't remember specifically.  
Q- Well let's restrict ourselves to what you were involved in.  
A -Hm,hm.  
Q- Is it your testimony today that you're not able to give us any additional  
information as to any meetings or discussions which took place subsequent to  
these particular queries?  
A- In early 1986, no466  
.
•
Wightman said at trial, in direct examination  
Q-Now, during the... over the course of the years that you were involved as the  
audit partner for the audit of Castor, did you ever have any discussions with Mr.  
Stolzenberg having regard to changes in the presentation of the financial  
statements?  
A- Yes.  
Q- Okay. With respect to which issue, do you recall?  
A- I remember suggesting to them that they consider adopting a statement of  
changes in financial position, and I think that was in eighty-five ('85) or eighty-six  
(
'86). At the time, I requested that the audit manager, who I believe at that time  
was Mr. John Grzelak, I asked him to, during the course of the audit, to prepare a  
draft statement of changes in financial position, and preparatory to visiting with  
Mr. Stolzenberg and showing him. I told him about it prior to showing it to him,  
and said that I was recommending it because the Institute had introduced the  
presentation that they recommended, highly recommended that the use of  
4
65  
66  
For other examples - see namely the following sections of the present judgment : Independence,  
Wightman, September 13, 1996, pp. 138-140  
4
500-05-001686-946  
PAGE: 99  
statement of changes in financial position be adopted and so, I told him that I  
recommended that Castor do that.  
Q- Okay. And what transpired in this regard?  
A- For that specific issue, John Grzelak prepared a draft financial statement  
showing the statement of changes in financial position along with the regular  
statement from... following the same format as preceding years, which was the  
statement of changes in net invested assets, and that was... I can't recall  
specifically whether we sent a copy of the draft to Stolzenberg before we went to  
see him, or whether we took it with us.  
Q- Okay. And who else was involved, from Castor's side of the table, in that  
discussion?  
A- Mr. Dragonas.  
Q- And did you have a meeting when you discussed this particular issue?  
A- Yes.  
Q- And do you recall... What's your recollection of the discussion that took place  
at that meeting?  
A- Yes. With respect to that particular item, they said that they had looked and  
considered the statement of changes in financial position, and that they felt it was  
more appropriate for Castor to continue to use their statement of changes in net  
invested assets.  
Q- And ultimately, the Court knows that the statement of changes in net invested  
assets continued to be used. What was your view, based on... further to that  
discussion, as to the SCFP and the use of the SCNIA, Mr. Wightman?  
A- I think I testified a long time ago that I felt that Castor was what I considered  
almost an investment club, and that the shareholders and the lenders were all  
closely connected, that if any of the shareholders or the lenders, they wanted a  
statement of changes in financial position, they would phone. I was unaware of  
anyone ever phoning and asking4  
67  
.
•
Wightman said at trial, in cross examination  
Mr. Wightman, what explanation do you have for the differences in your  
testimony before this Court this week and the testimony that you gave on  
September the thirteenth (13th), nineteen ninety-six (1996) concerning the  
467  
Wightman, February 8, 2010, pp.171-173  
500-05-001686-946  
PAGE: 100  
meeting with Mr. Stolzenberg, two (2) versions of the statement of changes and  
the presence of Mr. Dragonas at the meeting?  
A- Again, I... Since this was raised with me when I hadn't previously spent very  
much time and I didn't know what the questions were going to be, I had an  
opportunity to examine the working papers and I also believe that I saw some  
extracts from the testimony of Mr. Grzelak which refreshed my memory.  
Q- Now which working papers specifically are you referring to?  
A- I don't recall, but I think it would have been at or about the time that the  
Handbook changed.  
Q-You just said in your answer as part of the reasons for the difference in  
testimony is you examined the working papers.  
A- Yes, I went more carefully through everything and I also had an opportunity to  
look at extract of Mr. Grzelak's testimony.  
Q- Now when you say you went more carefully through everything, which specific  
working papers are you referring to that bear on this issue?  
A- I don't recall. I said at or about the time of the change in the Handbook.  
Q- So what years working papers?  
A- I don't know how many times I can tell you, but it's at or about the time of the  
change and I don't recall the change offhand.  
Q- Okay. But was it around nineteen eighty-five (1985) or nineteen eighty-six  
(
1986)?  
A- I believe so.  
Q- Then what working papers did you look at in the nineteen eighty-five (1985) or  
nineteen eighty-six (1986) working papers that caused you to better recall as you  
testify this week?  
A- I would have looked at probably the MAPS, I would have looked at the  
miscellaneous notes, I would have looked at all parts of the working papers.  
Q- But what was there specifically dealing with the statement of changes in the  
financial position that you saw in the working papers that caused you to change  
your testimony?  
A- .At this point, I don't recall.  
Q- Okay. Then I would like you to look at the MAPS and the miscellaneous notes  
for the years nineteen eighty-five (1985) and nineteen eighty-six (1986) and tell  
500-05-001686-946  
PAGE: 101  
the Court which documents in the working papers account for the change in your  
testimony.  
(
(
(
witness is looking at various PW-1053 exhibits and he does not find)  
…)  
Counsel for plaintiff asks for an undertaking – Counsel for the Defendants  
does not agree)  
(
…)  
The Court - I'm not directing that the exercise be done. I'm not asking that it be  
done, but if there is anything specific to which I should have a look, I'm expecting  
that I will be made aware of this at some point.  
So I'm not directing Mr. Wightman to do work. The answer we have is what we  
have. And there is nothing he can point us to as of now. And we know that we've  
been through two (2) of the three (3) elements. And in the two (2) of the three (3),  
we found nothing. It's going to stay there at this point4  
68  
.
[
498] Castor decided to continue to use a Statement of Changes in Net Investment  
Assets (“SCNIA”) and a conscious decision was made by C&L not to force the use of  
4
69  
the SCFP and, moreover, to accept changes to the usual presentation of the SCNIA .  
499] Indeed, starting with the 1985 financial statements, changes were made to the  
[
SCNIA including the elimination of information concerning what portion of the  
4
70  
investments maturing the following year was in fact repaid . Had the format of the  
SCNIA of previous years been used for 1985, the 1985 financial statements would have  
disclosed that only $27.4 million was received out of a total of $189 million of maturing  
investments.  
[
500] From 1985 onward, there was no disclosure of (i) proceeds from bank loans,  
notes payable and other items (but rather reference to “increases” thereof), (ii) the  
receipt of payments of the matured portion of mortgages, secured debenture and  
advances, and (iii) what payments were made by Castor to its lenders (but rather  
reference to “increases” in these liabilities).  
[
501] As an example, the SCNIA for the year ended December 31, 1985 showed the  
following:  
1985  
1984  
NET ASSETS AVAILABLE FOR INVESTMENT  
468  
469  
470  
Wightman, February 11, 2010, pp. 45 to 61  
Rosen, February 4, 2009, p.188  
Vance, March 10, 2008, pp.126 and following; Rosen, February 4, 2009, pp.160 and following (namely  
pages 170 and following) and Appendix A of PW-3034  
500-05-001686-946  
PAGE: 102  
Provided from operations  
10,887  
32,626  
45,728  
308  
9,087  
79,552  
28,173  
2,183  
Increase in notes payable  
Increase in bank loans and advances  
Increase in other liabilities  
Proceeds from loans, debentures and advances  
Proceeds from issue of capital stock  
32,482  
3,342  
7,711  
3,726  
________  
130,432  
——  
_
_
_
_______  
125,373  
LESS:  
Conversion of shareholder loans and advances into subordinated  
debentures (note 6 (a))  
24,602  
Redemption of common and preferred shares  
Dividends paid  
300  
6,587  
2,243  
736  
5,809  
Increase in other assets  
22,631  
_______  
________  
91,641  
101,256  
NET ASSETS INVESTED AS FOLLOWS  
Purchase of mortgages, secured debentures and advances  
Investment in joint ventures  
91,132  
509  
100,131  
1,125  
_______  
________  
91,641  
101,256  
[
502] While the Handbook focused more and more on cash, Castor’s financial  
statements moved in the opposite direction.  
Positions (in a nutshell)  
[
503] There is a dispute between experts as to whether the inclusion of the SCFP was  
471  
required. Vance and Rosen opine that the statement was required ; Selman opines  
4
72  
that it was not .  
Vance and Rosen  
Va n ce  
[
504] On March 10, 2008, Vance testified that:  
•
section 1540 was changed to require the Statement of Changes in Financial  
Position to portray only the cash resources, one of the reasons being cash is not  
a subjective asset, cash is cash, it's not easily manipulated or subject to  
management bias at all, and all entities under the Handbook were then required  
4
73  
to move to the Statement of Changes in Financial Position .  
4
71  
Vance, March 10, 2008, pages 144 following; Rosen, February, 4, 2009, pp.138-190; Rosen,  
February, 25, 2009, pp.111-119, 124  
472  
73  
Selman, May 8, 2009, pages 171 and following  
4
Vance, March 10, 2008, p. 17  
500-05-001686-946  
PAGE: 103  
•
After the introduction of section 1540, no provisions permitted anything other  
than cash resources to be used. Other suitable titles for this statement were  
“
cash flow statement, statement of operating, financing and investing activities or  
474 475  
statement of changes in cash resource” , all of them dealing with cash .  
[
505] Vance pointed out the following objectives and main features of the SCFP:  
•
•
To provide information about the operating, financing and investing activities of  
an enterprise and the effects of those activities on cash resources.  
To assist users of financial statements in evaluating the liquidity and solvency of  
an enterprise, and in assessing its ability to generate cash from internal sources  
to repay obligations, to reinvest and to make distributions to owners.  
•
•
To focus on the liquid financial resources readily available to the enterprise (its  
cash and cash equivalents).  
To disclose separately the amount of cash generated from operations because it  
is one of the key indicators of the ability of the enterprise to pay debts, replace  
assets, make due investments and distribute dividends to owners without  
drawing on external sources of capital.  
•
To complement and present information that is not provided or is only indirectly  
provided in the other statements (the balance sheet and income statement of  
retained earnings).  
[506] Vance emphasized on the 3 following italicised recommendations:  
1
540.05: The statement of changes in financial position should report the  
changes in cash and cash equivalents resulting from the activities of the  
enterprise during the period.  
1
540.06: The components of cash and cash equivalents should be disclosed.  
1
540.12: The statement of changes in financial position should disclose at least  
the following items:  
a) cash from operations. The amount of cash from operations should be  
reconciled to the income statement or the components of cash from operations  
should be disclosed; (…)  
4
74  
75  
PW-1419-1, section 1540, footnote (1988); PW-1419-2, section 1540, footnote (1989); PW-1419-3,  
section 1540, footnote (1990)  
4
Vance, March 10, 2008, p. 19  
500-05-001686-946  
PAGE: 104  
[
507] On the italicized recommendation 1540.12 (a), Vance explained that such  
disclosure was to allow a link from net profit to cash from operations so that the reader  
4
76  
could be able to follow the trail .  
508] Vance mentioned that section 1540.19 provided an exception that would permit a  
[
company to use a format other than the Statement of Changes in Financial Position, but  
4
77  
he confirmed that such exception could not apply to Castor .  
[
509] Section 1540.19 reads as follows:  
When a separate statement would not provide additional useful information, the  
presentation of cash flows in a financial statement format would not be  
necessary. For example, an enterprise may have relatively simple operations  
with few or no significant financing and investing activities and information about  
these activities and their effects on cash resources may be readily apparent from  
the other financial statements or could be adequately disclosed in notes to the  
478  
financial statement.  
[
510] Vance also explained that, in certain circumstances which were not present in  
the Castor situation, sections 1000.04 and 1000.50 could impact the issue of a  
4
79  
SCFP .  
1
000.04: "Financial statements normally include a balance sheet, income  
statement, statement of retained earnings and statement of changes in financial  
position. Notes to financial statements and supporting schedules to which  
financial statements are cross-referenced are an integral part of such  
statements."  
1
000.50 : In those rare circumstances where following a handbook  
recommendation would result in misleading financial statements generally offsets  
that accounting principles encompass appropriate alternative principles, when  
assessing whether a departure from handbook recommendations is appropriate,  
consideration would be given to  
a) the objective of the handbook recommendation and why that objective is not  
achieved or is not relevant in the particular circumstances;  
b) how the entity circumstances differ from those of other entities which follow  
the handbook recommendations and,  
c) the underline principles of accounting alternatives by referring to other  
sources, and as referenced to paragraph 1000.49 where it sets out what we  
would refer to as a hierarchy of GAAS  
476  
477  
478  
479  
Vance, March 10, 2008, pp.28-29  
Vance, March 10, 2008, pp.32-33 and pp. 71-72  
PW-1419-1 (1988); PW-1419-2 (1989) and PW-1419-3 (1990)  
Vance, March 10, 2008, pp.71-75  
500-05-001686-946  
PAGE: 105  
The identification of these circumstances is a matter of professional judgement.  
However, there is a strong presumption that adherence to handbook  
recommendations results in appropriate presentation and that a departure from  
such recommendations represents a departure from generally accepted  
accounting principles."  
[
511] Vance also testified that during the relevant years, namely in 1988, it was in the  
lending industry a standard to use a financial statement presentation that referred to  
cash and cash equivalents, the only two exceptions known to him being Royal Trust  
who had dragged to its feet and only changed in 1989 and Roynat, a subsidiary of  
Montreal Trust Co. while however Montreal Trust Co. itself had a proper SCFP on its  
4
80  
consolidated financial statements .  
[
512] Moreover, Vance added that, as mentioned in section 1000.49 of the Handbook,  
industry practices did not override applicable handbook recommendations in  
determining GAAP except to the extent that circumstances peculiar to the industry  
would make it misleading to follow a particular recommendation, which was not the  
4
81  
case .  
[513] Vance summarized his position on the SCFP as follows:  
There are a number of issues involved with the statement of changes in financial  
position. Firstly, this statement is designed to provide meaningful information to  
readers and users about the liquidity insolvency (sic – should be and solvency )  
of an enterprise.  
Had such a statement been used and presented, it would have firstly categorized  
the activities into operating, investing and financing activities and also, in so  
doing, would have shown that operations were draining the cash resources of the  
company significantly rather than operations generating cash, which they would  
do in a successful company.  
The statement could also have easily shown, as a line item, the amount of  
capitalized interest, which was not disclosed anywhere in PW-5, either as a  
policy or as to the amount that was occurring each year, and instead, Castor  
presented a statement of changes in net invested assets and what I find  
egregious is the asset they used to show the funds of the company was an asset  
that was grossly inflated by virtue of capitalized interest and by virtue of not  
writing... taking a loan loss provision.  
So they used probably the asset that was most misstated and focused on it as  
the fund statement. And that, I think, again, was very misleading to a reader. And  
as it was a departure from generally accepted accounting principles and as a  
4
80  
81  
Vance, March 10, 2008, pp.128-130  
Vance, March 10, 2008, p.133  
4
500-05-001686-946  
PAGE: 106  
significance or result of the departure was so material, I feel Coopers & Lybrand  
should have qualified their reports, but they did not do so4  
82  
.
Ros en  
[
514] Rosen emphasized on sections 1540.01, 1540.02, 1540.04 and 1540.06 of the  
483  
handbook :  
1
540.01. (…)  
The statement of changes in financial position assists the users of financial  
statements in evaluating the liquidity and solvency of the enterprise, and in  
assessing its ability to generate cash from internal sources to repay debt  
obligations, to reinvest and to make distributions to owners."  
1
540.02. The statement of changes in financial position focuses on the liquid  
financial resources readily available to the enterprise, its cash and cash  
equivalent. This focus provides a better indication of liquidity and solvency and  
the ability of an enterprise to generate cash resources than does a focus on  
working capital or other non-cash groupings.  
1
540.04 The statement of changes in financial position should report the  
changes in cash, in cash equivalence, resulting from the activities of the  
enterprise during the period."  
1
540.06. The components of cash and cash equivalents should be disclosed."  
[
515] Rosen explained that section 1540 of the CICA Handbook required cash  
484  
disclosures .  
[516] Rosen described the evolution of the section in the following terms:  
(
…) the evolution of this particular statement, like it's the newest of the  
statements in terms of accounting, was cash was the centre point, because it  
was necessary to separate between cash transactions and accrual-type  
transactions that make up the income statement and chunks of the balance  
485  
sheet  
.
[
517] Rosen compared the content of the SCNIA before and after 1985, before and  
4
86  
after the change was made to section 1540 of the Handbook .  
[
518] Rosen explained his writings “Castor's revised SCNIA was clearly designed to be  
virtually the opposite in concept to what the CICA was directing”: some of the most  
482  
483  
484  
485  
486  
Vance, March 10, 2008, pp.137-138  
Rosen, February 3, 2009, pp.38 and following  
Rosen, February 4, 2009, pp.138 and following  
Rosen, February 4, 2009, p.140  
Rosen, February 4, 2009, pp.168-169  
500-05-001686-946  
PAGE: 107  
crucial information that investors and creditors would want to know about liquidity and  
solvency, cash items and information, were hidden in the SCNIA included in Castor’s  
4
87  
audited financial statements of 1988 (as it had been the case since 1985).  
[
519] Rosen concluded that the 1988 audit report of C&L should have been qualified  
“
that GAAP is not being complied with and the thrust of section 1540 has not been  
4
88  
met” .  
Selman  
[
520] Selman’s view, which according to him was amply supported by the factual  
diversity of practice that existed at the time, was that section 1540 of the Handbook did  
4
89  
not require a SCFP but merely indicated what it should contain if one was provided .  
[
521] Selman suggested that Castor was not the only one not to provide a SCFP and  
so the Court should conclude that a SCFP was not required.  
[522] Selman’s overall opinion on the SCFP was:  
My position is that Castor's financial statements met GAAP despite the  
substitution of a statement of changes in net invested assets, for the form that we  
have seen being used by others' statement of changes in financial position. I  
think such a substitution was permitted, it was fully disclosed, it did not reduce  
the amount of information to which a reader was entitled to under generally  
accepted accounting principles of the day4  
90  
.
[
523] However, Selman acknowledged that Castor’s SCNIA did not meet the literal  
requirements of section 1540 of the Handbook.  
Mr. Vance may be correct in saying that the statement of changes format used  
by Castor did not meet the literal requirements of the Handbook, section 1540 to  
provide a SCFP, although the Handbook states only that it would normally  
appear and provides some room for exception (paragraphs 1000.04 and  
491  
000.05).  
1
A SCFP was required  
[
524] A SCFP was required – section 1540 and its italicized recommendations were  
clear. This separate statement would have provided additional useful information (and  
therefore the exception of section 1540.19 could not apply) and there was no risk to  
487  
488  
489  
490  
491  
Rosen, February 4, 2009, pp.175-179  
Rosen, February 4, 2009, p.188  
Selman, May 13, 2009, p.120  
Selman, May 13, 2009, p.129  
D-1295, p.112, para. 4.5.4.05  
500-05-001686-946  
PAGE: 108  
provide misleading information through a proper SCFP (and therefore the exception of  
section 1000.50 could not apply either).  
[
525] The simple fact that some financial statements identified by Selman did not  
include a SCFP is not conclusive.  
[
526] It is significant, however, that a SCFP was required by C&L in its own technical  
material.  
•
•
The specific need for a SCFP appears in C&L’s Tips and Tidbits dated April 25,  
492  
1986, in section 12 .  
The Technical Policy Statements of C&L which were in force during the period  
dealt specifically with the issue of a departure from a Handbook recommendation  
4
93  
as follows :  
«
Accordingly, a departure from the Handbook Recommendations  
will almost always require a reservation in the auditors’ report on  
financial statements purporting to be presented in accordance with  
GAAP.  
(…) Unless applying the Recommendation results in a misleading  
financial statement, the Recommendation must be followed».  
[
527] The audit clients of Wightman whose financial statements have been produced in  
494  
the record all included a SCFP .  
528] Mitchell, the audit manager in charge of the 1988 audit in Montreal (and also of  
[
the 1989 audit), stated that he did not recall having any other clients using the format  
4
95  
used by Castor in the statement of changes.  
[
529] Picard, the auditor in charge of the field work in Montreal during the 1989 audit  
stated that the format of the statement of changes must have been at the request of the  
client because the CICA Handbook was modified in 1985 and «donc, dans mes autres  
dossiers chez Coopers, j’avais modifié l’état d’évolution.»  
[
530] Hayes, who did reviews of Castor’s audited financial statements as the second  
496  
partner and who was handling many other client lender’s audits , testified as follows:  
4
4
4
92  
93  
94  
PW-1420-1D, T&T Summary Bulletins 1 to 63, p. 10.  
PW-1420-1B, TPS-A-400.  
PW-2908, Vol. 1, p. 4-C-6; PW-1053-23, seq. pp. 101, 112; PW-662-1; PW-662-1A; PW-662-1B; PW-  
6
62-1C; PW- 567-37  
495  
96  
Mitchell, April 25, 1996, p. 136.  
4
Hayes, October 31, 1995, pp. 20-22  
500-05-001686-946  
PAGE: 109  
Q. Do you recall having looked at the consolidated statement of Changes and  
Net Invested Assets?  
A. Yes.  
Q Is this the same type -of presentation that was used on banks that you were  
familiar with?  
A. Not at that time.  
Q When you say "not at that time", could you be more specific?  
A In earlier years, this had been a general statement, a general standard for  
statements such as this.  
Q. Until when?  
A. Until 1986.  
Q And after 1986 what was the change in presentation that was made?  
A. The general change in presentation was to regroup the numbers shown on  
this statement into different groupings.  
Q. And what were the different groupings?  
A. Funds provided from operations, funds provided from borrowing and funds  
provided from - or funds used in investment.  
Q. And what was the reason that that type of presentation was not used for  
Castor’s financial statements?  
A. I don't know specifically. These are the client's Statements, that would have to  
be asked of the client.  
Q But did you ever ask Mr. Wightman or anybody else why the changes in the  
presentation were not made for CASTOR's statements?  
A. I don't recall specifically.  
Q You don't recall having asked anybody?  
A. No.  
Q Do you know whether it was the client's desire to retain this form of  
presentation?  
A No, I assume it was.  
500-05-001686-946  
PAGE: 110  
Q But this was not the form of presentation that you were using for other lender  
clients?  
A. No497  
.
[
531] In the present litigation, during the cross-examination of Vance, he was criticized  
for a purported failure to identify to the Court that in “The External Audit”, the textbook  
by Anderson, the author indicated that there were two schools of thought in the  
4
98  
profession regarding the use of a statement of changes . However, the Anderson  
textbook was published in 1984 and, as correctly noted by Vance, any debate in the  
4
99  
profession was ended in 1985 when section 1540 was amended . From 1985  
onwards, it was mandatory for an operating company like Castor to include a SCFP  
showing its cash flows5 (unless the inclusion of such would be misleading to readers).  
00  
[
532] Castor came nowhere near qualifying for the exception provided for in section  
1
540.19:  
•
•
•
Castor’s operations were not simple;  
Castor had many financing and investing activities;  
Information about these activities and their effects on cash resources were  
neither readily apparent from the other financial statements nor disclosed in the  
5
01  
notes .  
[
533] In its own internal material, C&L expressed the opinion that section 1540.19  
would apply in very rare situations, almost never achievable by a company with active  
business operations (such as Castor).  
"
Paragraph 1540.19 of the handbook permits the omission of a separate  
statement of changes in financial position where the presentation of cash flows in  
a financial statement format would not provide additional useful information. In  
such situations, it is not necessary to include a note explaining why a separate  
statement has been omitted. We expect the instances where this is  
acceptable to be very rare and almost never achievable by a company with  
active business operations5 ." (Emphasis added)  
02  
[
534] Moreover, in the same internal material, C&L acknowledges the necessity to  
qualify the audit opinion paragraph in those circumstances:  
497  
498  
499  
500  
501  
502  
Hayes, October 31, 1995, pp.80-82  
PW-1421-7, pp. 584–585.  
Vance, May 27, 2008, pp. 226-228.  
PW-2908, Vol. 1, p. 4-C-10; PW-3108-3.  
Vance, March 10, 2008, pp. 32-33  
PW-1420-1D; Vance March 10, 2008, p.37-  
500-05-001686-946  
PAGE: 111  
"
If a separate statement of changes in financial position is not presented, the  
scope paragraph that the audit report should be silent with respect to changes in  
financial position, however the opinion paragraph should clearly state whether  
the financial statements present fairly the changes in the company's financial  
position in accordance with GAAP. If the effects of financing, investing and  
operating activities on cash resources are not adequately disclosed in the notes  
or apparent in the other financial statements, the audit report should be suitably  
503  
qualified ."  
[
535] The key underlying fact that leads to Vance’s criticism of the Castor financial  
statements in relation to not using a SCFP is the non-disclosure of capitalized interest  
and the fact that there just was not a disclosure of cash from operations.  
[
536] Vance opines that the SCNIA provided by Castor did not meet the requirements  
of Section 1540 of the CICA Handbook. Selman acknowledges that Vance may be right.  
[
537] Castor’s financial statements were in breach of GAAP in that they did not follow  
the italicized recommendation contained in the Handbook in October 1985 for a SCFP  
that would disclose the amount of cash generated by operations in the current year.  
[
538] In Castor’s case, investments and mortgages were not and could not be treated  
504  
as “cash or cash equivalent” .  
[539] Mitchell testified as follows:  
Q. Does the statement of changes of net invested assets provide cash and cash  
equivalents derived from operations?  
A. It has net assets provided from operations, but does not have cash and cash  
equivalents provided from operations."  
Q. Why is that?  
A. This statement is not intended to give… to provide that information. It's not a  
statement of changes in financial position5  
05  
.
[540] Higgins, a C&L partner who did a peer review of the 1987 Castor audit, stated:  
Q. I would like to look at the 1987 financial statements with you again, which is in  
file one. Based upon the financial statements before you, would you indicate to  
us what cash was generated from operations of Castor in 1987?  
A- There is no specific reference to the cash generated.  
503  
504  
505  
PW-1420-1D  
Hayes, October 31, 1995, pp. 65 to 68; Grezlak, October 21, 1996, pp.229 -230  
Mitchell, April 25, 1996, p. 134  
500-05-001686-946  
PAGE: 112  
Q- I understand from your previous testimony that you were aware at the time  
that the CICA handbook required that such disclosure be made?  
A- I was aware.  
Q- Why, based upon your audit experience, must what cash is generated from  
operations be disclosed?  
A- Generally speaking, it provides a reader of the financial statements,  
specifically, what cash or working capital has been generated from the  
operations.  
Q- Why is that information provided?  
A- It provides the reader with the amount that has been generated from  
operations.  
Q- It allows the reader —-?  
A- One of the elements in the review of the financial statements.  
Q- So it allows the reader to know whether the company will have sufficient cash  
flow to finance its ongoing activities?  
A- It’s an indicator of how much cash is being generated from operations.  
Q- Did you understand, in 1988 when you did the review that Coopers standards  
required that such cash flow information should be disclosed in financial  
statements?  
A- It was a requirement at the time of the CICA to prepare such a statement.  
Q-You were aware of that?  
A- And I was aware of that.  
Q- No such information is contained in this particular financial statement?  
A- The statement that was prepared was a statement of changes in net invested  
assets.  
Q- Which does not provide the information required by the handbook?  
A- It does not, specifically, refer to cash provided.  
Q- Which was the recommendation of the handbook?  
500-05-001686-946  
PAGE: 113  
A- Yes, that was one of the elements to that statement,— yes506."  
[
541] C&L collaborated with management to use a form of presentation that failed to  
comply with the revisions made to section 1540 of the Handbook in 1985. It was the  
obligation of C&L to express an opinion to the effect that the audited financial  
statements were not prepared in accordance with GAAP or to require management to  
use a SCFP in order for C&L to express an unqualified opinion. Alternatively, if  
management still insisted upon the use of a SCNIA, C&L was obliged to express a  
reservation of opinion and to disclose that the SCNIA was not in accordance with  
GAAP.  
[
542] Had C&L required a proper SCFP, same would have disclosed inflows and  
outflows of cash, including cash provided by operations. This would have required a  
disclosure of the amount of revenue recognized by Castor which was not received in  
cash, such as capitalized interest.  
Undisclosed related party transactions  
[
543] No doubt related party transactions (“RPTs”) were undisclosed in the 1988  
financial statements.  
507  
544] The Handbook defines related parties .  
[
[
545] Section 3840.03 of the Handbook provides:  
Parties are considered to be related when one party has the ability to exercise,  
directly or indirectly, control or significant influence over the operating and  
financial decisions of the other. Two or more parties are also considered to be  
related when they are subject to common control or significant influence5  
08  
.
[
546] The key element that must exist is one of control over operating and financial  
decisions regarding the transaction between the reporting entity and the other party.  
[
547] Only transactions which fit that description - an auditor cannot oblige his client to  
disclose more than GAAP requires- but all such transactions are required to be  
disclosed.  
[
548] Given his actual role, and not because of his title, Stolzenberg had the ability to  
exercise control or significant influence, directly or indirectly, over the operating and  
financial decisions of Castor and its subsidiaries. Stolzenberg was related to Castor and  
its subsidiaries.  
506  
507  
508  
Higgins, December 18, 1996, pp.110-112  
PW-1419-1, sections 3840.03 to 3840.08 (1988)  
PW-1419-1 (1988)  
500-05-001686-946  
PAGE: 114  
5
09  
[
549] Transactions between Castor and Stolzenberg , or between Castor and  
companies in which Stolzenberg had significant control or influence, were RPTs to be  
5
10  
disclosed . Castor’s audited consolidated financial statements disclosed some of  
5
11  
those transactions as RPTs , but not all of them.  
5
12  
[
550] Stolzenberg was the owner of record of 612044 Ontario  
and through it, of  
9
9
7872 Canada. Stolzenberg was the incorporator, the President and a director of the  
5
13  
514  
7872 . 612044 had pledged its shares of 97872 to secure a loan from Castor .  
[
551] Because they were subject to common control or significant influence through  
Stolzenberg, Castor’s transactions with 97872 Canada and 612044 Ontario should have  
been disclosed. 5  
15  
[
552] Stolzenberg had the ability to exercise, and did exercise significant control or  
516  
influence on Trinity Capital Corporation (“Trinity”) . Because they were subject to  
common control or significant influence through Stolzenberg, Castor’s transactions with  
5
17  
Trinity should have been disclosed .  
[
553] Given their actual role, not because of their titles and notwithstanding the fact  
that Stolzenberg had generally the final decision-making authority, Gambazzi and  
Bänziger had the ability to exercise control or significant influence, directly or indirectly,  
over the operating and financial decisions of Castor and its subsidiaries. Gambazzi and  
Bänziger were related to Castor and its subsidiaries.  
[554] Section 3840.04 (d) provides:  
5
5
5
5
5
5
5
09  
10  
11  
12  
13  
14  
15  
Wightman, September 5, 1995, p. 121.  
Wightman, July 18, 1996, p. 90.  
Transactions with 606752, Wost Holdings and Wost Development  
PW-338  
PW-1102A-6  
PW-2908, vol.1. p.4-E-32 and PW-1102A-6  
PW-1102-A6 ; O’ Connor, January 14, 2009; O’Connor, January 15, 2009; PW-167 Y, PW-292, PW-  
3
23, PW-324, PW-325, PW-340, PW-565, PW-566-18, PW-571-15A, PW-571-15B, PW-571-15C,  
PW-571-22, PW-571-23, PW-572-2, PW-572-4, PW-572-5, PW-572-10, PW-572-13-1, PW-572-27,  
PW-573-51,PW-573-53, PW-668-1a, PW-668-1c, PW-669-1e, PW-669-2a, PW-669-3a, PW-1101,  
PW-1102, PW-1103, PW-1159-A-1, PW-2400-88, PW-2400-104,PW-2400-112,PW-2400-118, PW-  
2
400-119, D-94, D-97, D-115, D-1078 ; PW-326, PW-327, PW-328, PW-566-18, PW-566-25a, PW-  
103, PW-1053-23-12  
1
5
16  
17  
Finn, July 25, 2000, pp. 241 to 245, 283, 284, 287 to 292; Finn, July 26, 2000, pp.400,401, 437, 439,  
4
62, 469, 471, 494, 495, 511 and 512; Binch, October 29, 2001, pp.30, 45; Binch, October 30, 2001,  
pp.197, 219, 232; Binch, October 31, 2001, pp.392,393, 394, 402, 471, 480; Vance, June 4, 2008,  
pp.43-46, Rosen, March 31, 2009, pp 204-210 and Selman, May 7, 2009, pp. 69-70; See also  
exhibits D-600, D-601, D-602, D-603, D-604, D-869, D-872, D-873, D-875, D-876, D-899, D-901.  
PW-1419-1, 3840.03 and 3840.10 (1988); PW-1419-2, 3840.03 and 3840.10 (1989) and PW-1419-3,  
5
3
840.03 and 3840.10 (1990)  
500-05-001686-946  
PAGE: 115  
The extent to which a relationship between two parties can be clearly perceived  
will vary, but the most commonly encountered and easily identifiable related  
parties of a reporting enterprise would include the following:  
(
…)  
(
d) management: any person(s) having authority and responsibility for planning,  
directing and controlling the activities of the reporting enterprise. Thus, in the  
case of a company, management would include the directors, officers and other  
persons fulfilling a management function;  
[
555] In fact, Castor, as well as C&L, considered all shareholders and directors to be  
parties related to Castor.  
[
556] Wightman testified that he considered Castor to be «almost an investment club,  
518  
so that the shareholders and the lenders were all closely connected» and «that the  
5
19  
directors represented the … most of the shareholders, directly or indirectly. »  
557] Several corporate entities, both borrowers and lenders to Castor, were  
[
represented by Gambazzi, a director of CHL, a director of several of its subsidiaries and  
5
20  
the managing director of CHIF .  
558] Several corporate entities, both borrowers and lenders to Castor, were  
[
5
21  
represented by Bänziger, a director of CHINBV who «was tremendously involved in  
5
22  
523  
the operations of Castor Europe» , who was part of Castor’s management and who  
5
24  
had the same powers regarding CHIO as Stolzenberg did .  
[
559] Castor’s files contain hundreds of documents signed by either Gambazzi or  
Bänziger such as loan agreements, promissory notes, pledge agreements, audit  
confirmations, and commitment letters. In some instances, Gambazzi signs «in trust»  
5
25  
but in many other instances there is no indication of «in trust» .  
[
560] For disclosure purposes, when one of the parties to a transaction is acting  
through a person acting “in trust”, it is not the relationship between the person acting “in  
trust” and the reporting entity that matters, but the relationship between the actual  
parties to the contracts – i.e. the principals. There is therefore no automatic reportable  
relationship between two entities when a person acting “in trust”, who is director of the  
first entity, is acting for a second entity, even when he sits on the Board of that second  
5
5
5
5
5
18  
19  
20  
21  
22  
Wightman, February 8, 2010, p. 173  
Wightman, October 11, 1995, p.69  
PW-2908, Vol. 1, pp. 4-E-33, 4-E-34.; PW-1053-22  
PW-2400-34.; PW-2282;  
Wightman, September 7, 1995, pp. 138-139 and September 8, 1995, pp. 42 and 46. See also PW-  
1
053-63C-4, PW-2400-34 and PW-2400-42  
523  
524  
525  
PW-1053-91-2, PW-10  
Zampelas, March 15, 1999, p. 12; PW-931.  
PW-1496-4-88-N-1C  
500-05-001686-946  
PAGE: 116  
entity and is therefore also presumed to be related to it. Both entities will be related if  
and only if the person acting “in trust” has the actual ability to exercise control or  
significant influence, directly or indirectly, over the operating and financial decisions of  
both entities.  
[
561] Because Gambazzi and Bänziger signed loan documents and audit  
confirmations on behalf of offshore borrowers and lenders, and because of Gambazzi  
and Bänzinger’s respective role regarding those offshore borrowers and lenders, which  
allowed them to exercised control or significant influence, directly or indirectly, some  
transactions between Castor or its subsidiaries and those offshore borrowers and  
lenders should have been disclosed as RPTs.  
526  
[
562] Gambazzi was a close personal friend of Stolzenberg and acted on his behalf  
in related entities that Stolzenberg owned or controlled or in which he had an interest,  
and which had transactions with Castor and its subsidiaries.  
[
563] CHIF made loans to companies in which Bänziger was involved, such as  
527  
Investamar : These transactions were not disclosed as RPTs and they should have  
been.  
On page B46 of the CHIF 19885 working papers in connection with two loans to  
28  
Investamar S.A., the following notation appears:  
“
This shortfall on the other loan is acceptable as the company is Mr. E.  
Bänziger”.  
[
564] It is highly probable that much more needed to be disclosed given the numerous  
5
29  
and strong indicia revealed by the evidence but, more than 20 years later, indicia are  
not enough to reach final conclusions. However, and not surprisingly, Defendants wrote  
in their written argument submitted on July 8, 2010:  
Defendants acknowledge that based on the partial record before the Court, there  
is a possibility that the disclosure in the 1988 financial statements did not meet  
GAAP in that some transactions that now appear to have related party indicators  
may have been RPTs.  
Artificial improvements of liquidity and undisclosed restricted cash  
5
5
5
26  
27  
28  
PW-1053-49, seq. p. 264  
Jean Guy Martin, August 26, 1996, p.84  
PW-1053-91-8, seq. p. 241. See also same kind of annotation in the 1989 AWP – PW-1053-89-6,  
sequential page 257).  
529  
See Vance, March 12, 2008 pp. 50 and following (discussions on the YH and the DT Smith group)  
Vance, May 12, 2008, pp.197 and following; Vance, June 4, 2008, pp. 118 and following; see also the  
testimony and the written report of Levi  
500-05-001686-946 PAGE: 117  
[
565] Castor’s liquidity was artificially improved in the 1988 consolidated audited  
financial statements as a result of the following elements:  
•
•
•
The maturities used in notes 2, 3 and 4;  
The 100 million debentures transaction;  
The undisclosed restricted cash in the amount of $US 20 million.  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Pla in t iff  
[
566] Plaintiff argues:  
•
Notes 2, 3 and 4 to the 1988 consolidated audited financial statements were  
materially misleading and disclosed a false picture of liquidity matching and  
solvency.  
•
The maturity notes conveyed to the reader that there was good maturity  
matching but in reality, it was just the opposite. There was no reasonable  
expectation that the loans included as “current” would be or could be repaid  
during the current year.  
•
Maturity dates of various assets (loans receivable) and liabilities (loans payable)  
were altered during the audit; changes, unsupported by audit evidence, were  
accepted by C&L to the maturity dates. By advancing the due date of various  
receivables before their actual due dates and by extending the due date of  
various liabilities beyond their actual due dates, Castor improved its apparent  
liquidity position.  
Defen d a n t s  
[567] Defendants argue:  
•
Plaintiff’s experts have misread the notes to the financial statements. Vance and  
Rosen have asserted that these notes were misleading because they were  
possibly incorrect with respect to the amounts shown as maturing in future years,  
and because they misled the reader into believing that Castor was going to  
receive as much as 70-80% of its revenue in cash within the next year, whereas  
in reality, Castor’s assets were not that liquid. Rosen described the mismatch as  
being between long-term lending and short-term borrowing.  
500-05-001686-946  
PAGE: 118  
•
Defendants submit that Plaintiff’s experts are attempting to read something into  
the financial statement notes that is not there, nor required to be there. Rosen  
and Vance confused the concepts of “maturity” and “liquidity”.  
•
Plaintiff has failed to demonstrate that the disclosures as to contractual maturity  
dates made in the 1988 financial statements were not materially correct.  
!
For the vast majority of transactions, the evidence demonstrates  
that the note disclosure was accurate.  
!
The only significant transaction for which there is inadequate  
evidence to determine whether the note was accurate is the  
transaction involving Gambazzi. Plaintiff could have met his burden  
of proof by calling Gambazzi. He did not and, therefore, the Court  
should draw an adverse inference in this respect.  
Evidence – Maturity matching notes 2, 3 and 4  
[
568] The 1988 overseas Matters for Attention of Partners (“MAPs”), sent to  
Wightman, addressed the issue of “matching of maturities” as follows:  
«
When reviewing the CHI N.V. and CHI B.V. consolidated financial statements, it  
is difficult to judge whether or not the companies will be able to meet their  
obligations when they come due as the intercompany account must be used to  
offset the shortfall. Therefore, a liquidity matching should be prepared on a  
consolidated basis in Montreal (asset vs. liability maturities) to ensure that the  
Castor group as a whole are in a good position. »5  
30  
531  
569] Thus, C&L prepared a consolidated liquidity schedule for Castor and reported  
532  
[
the results in the 1988 MAPs .  
570] Since Castor prepared a non-classified balance sheet in order to evaluate the  
[
company’s short-term obligations as well as its ability to meet these obligations, one  
5
33  
had to refer to the Maturity Notes . As a matter of fact, and to prepare their liquidity  
5
34  
535  
test which was a crucial aspect to consider , that is exactly what C&L did .  
[
571] On the basis of the content of these Notes, several of the experts, including  
Defendants’ expert Selman as well as witnesses from C&L, indicated that Castor had no  
530  
531  
532  
533  
534  
535  
PW-1053-74, seq. p. 5;  
PW-1053-22, seq. p. 193;  
PW-1053-21, seq. p. 373,  
PW-2908, Vol. 1, p. 4-F-1.  
Hayes, October 31, 1995, pp. 88, 94, 101, 108 to 111  
PW-1053-22, seq. p. 351, PW-1053-17, seq. pp. 382-383, PW-1053-21, seq. p. 373, PW-1053-17,  
seq. p. 18, PW-1053-12, seq. p. 74; Hayes, October 31, 1995, pp.88, 94, 111  
500-05-001686-946  
PAGE: 119  
5
36  
liquidity problem . Selman’s answer included the following reserve “providing the loans  
5
37  
that they were using had the value that they were being carried at ” – a premise  
which, in Castor’s case, was part of the “appearances” but not part of the “reality”, as  
discussed earlier and further in the present judgment.  
[
572] Castor’s intent, with respect to the Maturity Notes was evidenced by:  
5
38  
•
their promotional materials ;  
o For example: “The short term nature of Castor’s portfolio and careful  
attention to asset and liability matching enable the Company to ensure  
liquidity and funding stability.”  
5
39  
•
•
the Minutes of the meetings of the Board of Directors ;  
the supplemental information packages prepared to assist the funding officers to  
interpret the financial results when they were meeting with lenders and potential  
lenders;  
o For example: «compares the maturity structure on the assets side to the  
maturity structure on the liability side, and people at times asked the  
question «Well, what is your liquidity exposure or liquidity risk? And this  
5
40  
presentation addresses that question…» .  
[
573] Selman criticized Vance’s opinion that the primary purpose of the Maturity Notes  
was liquidity testing. He opined that they were rather intended to convey interest rate  
5
41  
risk, which would be adjusted when the loans were rolled over and renewed .  
[
574] Selman’s critic of Vance’s position contradicts the evidence showing the purpose  
542  
of the Maturity Notes from Castor’s perspective . Moreover, in order to maintain his  
position, Selman was forced to disagree with the C&L witnesses such as Higgins and  
with the explanation of these Maturity Notes that appear in the AWPs (which equate  
5
43  
maturities with cash to be received in the coming year) . When asked directly by the  
Court whether he was opining that C&L’s conclusions in their AWPs were incorrect,  
Selman tried to “improve” his response by suggesting that the work performed by C&L  
5
36  
For example : Prikopa, January 12, 2005, p. 65; Lowenstein, March 21, 2005, pp. 40-41; Jarislowsky,  
April 4, 2005, pp. 141-142; Higgins, December 18, 1996, pp. 51-54; Cunningham, December 13,  
1
996, pp. 96-102; Selman, June 4, 2009, pp. 223-224.  
537  
538  
539  
540  
541  
542  
543  
Selman, June 4, 2009, pp. 223-224  
PW-1057-1, PW-1057-2, PW-1057-3, D-186 & D-187  
PW-2400-23  
D-1045, Schedule IV  
D-1295, pp. 295–296, para. 6.9.52.  
PW-1057-1, PW-1057-2, PW-1057-3, D-186 & D-187 ; PW-2400-23; D-1045, Schedule IV.  
Selman, June 4, 2009, pp. 218-219.  
500-05-001686-946 PAGE: 120  
was only a “short-cut applying a standard commercial method of doing liquidity  
5
44  
testing” .  
[
575] Before the finalization of the 1988 consolidated financial statements, Bänziger  
suggested that changes be made to maturity dates: these changes related to the  
maturity dates of receivables and liabilities. Bänziger was suggesting that the maturity  
dates of certain receivables be disclosed at an earlier date than that shown in C&L’s  
audit evidence and Castor’s records. And he further requested that certain liabilities be  
shown as maturing at a later date than that shown on the audit confirmations.  
[
576] Vance opined that there was $134,973 of unsupported changes to maturity  
545  
dates .  
[
577] Selman opined that the changes were acceptable except for a few, most of which  
were not material.  
CHL- Sk yeboa t a n d 3 2 1 3 5 1 Alber t a  
[
578] Vance opined that CHL’s loans to Skyeboat and 321351 Alberta Ltd were  
incorrectly reclassified as maturing in 1989 whereas external evidence in C&L’s hands  
(
confirmations and promissory notes) showed they were maturing on January 31,  
546  
991 .  
1
•
•
The AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
Moreover, and as a matter of fact, in the documentation provided by Castor to  
C&L for the 1989 audit, on the mortgage continuity schedule, those loans were  
5
47  
again shown as maturing on January 31, 1991 .  
[
579] In the cases of Skyeboat and 321351 Alberta, Selman suggested that the  
maturity changes were appropriate based on letters sent by Ron Smith to those debtors  
5
48  
on December 15, 1988, in which Smith wrote :  
Letter to Skyeboat:  
With reference to the abovementioned grid promissory note, we hereby confirm  
that, notwithstanding the maturity date mentioned in the grid promissory note, the  
loan shall be:  
5
44  
45  
Selman, June 4, 2009, pp. 215-224.  
5
PW-2908, volume 1, chapter 4F and revised schedule 4F-13 (PW-2908 A). On that topic, see Vance,  
March 12, 2008, Vance, June 5, 2008 and Vance, September 2, 2008.  
PW-1053, E-172 and E-174; Vance, March 12, 2008, pp.101-103  
PW-1053-19-32, E-10 and E-11; Vance, March 12, 2008, pp.101-103  
Selman, May 20, 2009, pp.134-136  
546  
547  
548  
500-05-001686-946  
PAGE: 121  
1
) Subject to an annual review which should take place no later than April 30th of  
each year, commencing April 30th, 1989; and  
2
) On a demand basis at the option of Castor Holdings Limited."549  
Letter to 321351 Alberta  
We hereby confirm that, notwithstanding the maturity date mentioned in the  
"
promissory note, it will be subject to an annual review, and then will be on a  
demand basis at the option of Castor.5  
50  
"
CHIBV- La m ber t a n d Sk yview  
[
580] Vance opined that CHIBV’s loans to Lambert and Skyview were incorrectly  
reclassified as maturing in 1989 whereas evidence in C&L’s hands showed that the  
Lambert loan was to mature in 1990 and the Skyview loan in 1993.  
•
The reclassification was done by Ford further to a written request received from  
551  
Bänziger .  
•
The amount for Lambert represented capitalized interest and placement fees that  
were added to the loan balance in CHIF, a subsidiary of CHIBV. The amount of  
the capitalized interest and placement fees that were owed for the 1987 year, as  
at December 31, 1988, were paid in early 1989, before the 1988 audit was  
5
52  
completed and those payments were noted by the auditors . The remaining  
balance was recorded as paid during 1989 but, as will be discussed further in the  
present judgment, this payment was a circular movement of Castor’s own cash.  
•
The amount for Skyview represents unpaid interest and was never paid as it was  
capitalized to the loan balances in Montreal.  
[
581] In the case of the Lambert loans, Selman suggested that the maturity changes  
were appropriate for the following reasons:  
•
•
capital and interests have to be segregated;  
as per the loan agreement, interests had to be kept current;  
549  
550  
551  
552  
D-573  
D-574  
PW-1053-74-9  
PW-1053-91, sequential pages 231-232 (B-36 and B-37); Vance, March 12, 2008, pp.108 and  
following  
500-05-001686-946  
PAGE: 122  
•
evidence that a circular transaction would have taken place in 1989 is irrelevant –  
in relation to decisions to be taken by the auditors for the 1988 financial  
5
53  
statements, it would constitute hindsight .  
[
582] In the case of Skyview, Selman acknowledged that it was a mistake to change  
554  
the maturity date; he indicated that the amount was dealt with through a CHL account  
5
55  
and he added that the amount was not material .  
CHIO – DT Sm it h – Ten n is Cou r t Villa s a n d Wood Ra n ch  
[
583] Vance opined that CHIO’s loans to DT Smith for the Wood Ranch and Tennis  
Villas projects were incorrectly reclassified as maturing in 1989 while they were  
5
56  
originally shown as maturing in 1990 .  
•
The reclassification was done by Ford further to a written request received from  
557  
Bänziger .  
In the working papers, the maturity date was shown as 1990 .  
5
58  
•
•
•
5
59  
Confirmations sent and received showed a maturity date of 1990 .  
D.T. Smith's own auditors (Rogoff – Strassberg) had sought confirmation from  
CHIO of the loans, shown on DT Smith’s financial statements as payables, and  
both confirmations received from CHIO showed Wood Ranch and Tennis Court  
5
60  
Villas’ loans as maturing on October 31, 1990 .  
•
The AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
[
584] In the case of Tennis Court Villas, Selman agreed with Vance that the  
561  
agreements called for a 1990 maturity date . However, Selman added that same  
agreements included a provision requiring early payment in order to release CHIO's  
rights against the units that were sold and, therefore, he qualified the issue as follows:  
553  
554  
555  
556  
557  
558  
559  
560  
561  
Selman, May 20, 2009, pp.137 -141  
PW-167T  
Selman, May 20, 2009, pp. 153 and 154 and D-1295, pages 282-283  
Vance, March 12, 2008, pp. 113 and following  
PW-1053-74-9  
B-3, B-5, B-7 and B-11  
PW-1133B, Bates numbers 2067 and 2069 and numbers 2072 and 2074  
PW-1118-6-1 and PW-1125-11-1  
Selman, May 20, 2009, p.156  
500-05-001686-946  
PAGE: 123  
The issue for the auditor faced with the client's assertion that the acceleration  
clause such as this one existed and will become operative is whether that  
anticipation that the client can be supported by persuasive audit evidence5  
62  
.
[
585] Selman suggested that the provision had “to be read as an agreement to a  
reciprocal change in the date payment in the event of the specific change  
5
63  
circumstances of a sale of a lot-by-lot basis” . He invited the Court to look at “how  
5
64  
much information there actually was with respect to the sale of lots” .  
[
586] In the case of the Wood Ranch project, Selman mentioned there were comments  
565  
but he did not expand at all on that topic, in examination in  
in his written reports  
5
66  
chief .  
[
587] In his report D-1295, Selman wrote “I will deal with the issues that this raises  
567  
under Tennis Court Villas. My general comment there have equal application here. ”  
[
588] Selman acknowledged that he could neither say if the documents he was looking  
568  
at were seen by Ford nor point out what Ford might have looked at .  
[
589] In both cases, Tennis Court Villas and Wood Ranch, Selman mentioned that he  
569  
would have liked to see more information for the revisions and in cross-examination,  
on June 10, 2009, he made it clear that he had not opined that the changes were  
acceptable. 5  
70  
CHL- Na t ion a l Ba n k , Sociét é Gén ér a le a n d Ca is s e Cen t r a le Des ja r d in s  
[
590] Vance opined that CHL’s liabilities to various banks which were initially indicated  
as being due either on demand or in 1989 were incorrectly revised to show maturity  
dates of 1990 or 1991.  
5
71  
•
CHL’s liability to National Bank of Canada was revised to March 13, 1991 .  
o The confirmation signed by the National Bank indicated February 17, 1989  
5
72  
as the maturity date.  
562  
563  
564  
565  
566  
567  
568  
569  
570  
571  
572  
Selman, May 20, 2009, p 157.  
Selman, May, 20, 2009, pp. 157-158  
Selman, May 20, 2009, pp. 158-164  
Selman, May 20, 2009, p.154; Selman, May 21, 2009, p.68  
Selman, May 20, 2009 and Selman, May 21, 2009  
D-1295, para. 6.9.23, p. 283  
Selman, June 10, 2009, p.136, 143, 148  
Selman, May 21, 2009, p. 68; Selman, June 10, 2009, pp.136 and following  
Selman, June 10, 2009, pp. 205-206.  
PW-1053-25-1 BB-101  
PW-1053-25-7, sequential page 148 (BB 236)  
500-05-001686-946  
PAGE: 124  
o The AWPs contain nothing that would show, or could show, why and how  
5
73  
C&L proceeded to (or accepted) such a reclassification .  
•
CHL’s liabilities to Société Générale (Canada) were revised to January 19,  
574  
991 .  
1
o The liabilities were composed of an operating loan, in the amount of  
$
1,945,320 at year-end, and of two term loans totalling $6.8 million at  
575  
year-end ($4,276,228 plus $2,531,490) .  
o The confirmations signed by Société Générale (Canada) indicated March  
2
1, 1989 for the operating line and March 28, 1989 for the two term  
576  
loans.  
o The AWPs contain nothing that would show, or could show, why and how  
5
77  
C&L proceeded to (or accepted) such a reclassification .  
•
CHL’s liabilities to Caisse Centrale Desjardins were revised to April 30, 1990 and  
578  
April 13, 1991 .  
o There were two liabilities to Caisse Centrale Desjardins: 7.5 million and 5  
million.  
5
79  
o The term of the 7.5 million was, initially, December 31, 1988 but it was  
5
80  
extended to February 28, 1989 .  
o The term of the 5 million is “on demand”.  
o The confirmations signed by Caisse Centrale Desjardins indicated  
!
for the 7.5 million loan : February 28, 1989.581  
For the 5 million loan: On demand.582  
!
o The AWPs contain nothing that would show, or could show, why and how  
5
83  
C&L proceeded to (or accepted) such a reclassification .  
5
5
5
5
73  
Vance, March 12, 2008, pp.122 to 126  
74  
75  
76  
PW-1053-25-1, sequential page 49 (BB 101)  
PW-1053-25 and D-563 and D-564  
PW-1053-25-7, sequential 151 to 153 (pages BB 239, BB 240 and BB 241); Vance, September 2,  
2
008. pp. 99 and following.  
577  
578  
579  
Vance, March 12, 2008, p.122  
PW-1053-25-1, BB-102 (sequential page 51) and BB-103 (sequential page 53)  
D-567-1 and D-567-1, Appendix 1; Vance, September 2, 2008, pp.48 and following. See also PW-  
2
483 and PW-2484  
580  
581  
582  
583  
PW-2485 (see also PW-2485-1 and PW-2486)  
PW-1053-25-7, BB 155 and BB 196  
PW-1053-25-7, sequential page 105  
Vance, March 12, 2008, p.122  
500-05-001686-946  
PAGE: 125  
5
84  
o It was totally reimbursed in 1989 .  
[
591] In the cases of the loans payable by CHL to National Bank, Selman opined that  
the changes were acceptable based on:  
85  
•
The evidence5 concerning the computer systems in use – since they were not  
programmed to distinguish between maturity date of capital and due dates of  
interest instalments, the confirmations that had been sent out did use the interest  
5
86  
payment due dates instead of the contractual maturity dates .  
The evidence concerning the various facilities.587  
•
•
5
88  
and the general GAAP rule of looking at the  
The capacity of CHL to rollover  
substance of things rather than looking at their form .  
5
89  
[
592] To conclude in such a way, Selman said the following about the confirmation  
process:  
the confirmations were for the purpose of providing assurance as to the  
existence of the loans and the amounts of the loans, the amounts owing, that's  
the purpose of confirmations. So the fact that the confirmations showed interest  
due dates was no more than to assist the Bank to situate itself in terms of what  
the amount was that it was being asked to confirm, because it included the  
interest.  
The confirmations didn't have the purpose of providing the evidence for the  
maturity schedules in the financial statements (…)  
in my view, that those confirmations were not reliable audit evidence as to the  
maturity dates of the loan and there wasn't a contradiction5  
90  
.
[
593] Selman acknowledged that one of the notes concerned the “facility B” and that in  
591  
989 Castor treated that as a “short term facility”, but he said they did not have to .  
1
[
594] Selman said that Vance’s position was also acceptable but that it was wrong for  
592  
Vance to opine that his view was the only one acceptable in those circumstances .  
5
84  
85  
PW-2921  
5
Simon, April 28, 2009, 218 to 221, 226, 232 to 237 and 245 to 256; PW-1053-18-3; (D-1295, pp. 286  
and following - see also PW-1053-12 and D-333-1)  
Selman, May, 20. 2009, pp.188 and following  
D-562 (National Bank credit facilities)  
586  
587  
588  
589  
590  
591  
Selman, May 20, 2009, pp. 195-196  
Selman, May 20, 1989, p. 196  
Selman, May 20, 2009, pp.189-190  
Selman, May 20, 2009, pp. 195-196  
500-05-001686-946  
PAGE: 126  
[
595] Selman summarized his understanding and his views on Vance’s position  
regarding note 2 as follows:  
So Castor wasn't required to provide the information in note 2 in respect of its  
own lendings, but it did.  
But Mr. Vance won't accept the same principle with respect to note 2, which is  
one of the difficulties that I'm having with this, and as well, he's insisting that,  
when there is a short-term note within the long-term facility, when you do this  
table, you have to use the short-term note on the liability side, and it's  
inconsistent, it's illogical and it's wrong5  
93  
.
[
596] In the case of CHL’s loans to Société Générale, Selman explained that the  
594  
and that, therefore, there was always a legal right  
facility was an “evergreen facility”  
5
95  
to use the facility for an extension .  
"
Extendable annually at the anniversary of the loan for an additional year based  
on the last audited financial statements of the borrower and subject to Société  
Générale Canada's approval. "5  
96  
[
597] Selman acknowledged that the note had been signed with a maturity date of  
1
989, but he said that under the “evergreen facility” the Bank could not prevent CHL  
597  
from extending it to 1990 ; the facility included an “events of default provision”, but the  
5
98  
credit facilities could not be withdrawn at will .  
598] Selman mentioned that in January 1989 Société Générale extended its  
[
5
99  
evergreen facility to 1991 and he suggested that C&L had probably seen that since  
6
00  
they accepted to change the maturity date from 1989 to 1991 .  
599] However, since it was not part of the evergreen facility, Selman opined that C&L  
[
should not have accepted the change of maturity date on the operating line of 2 million  
6
01  
with Société Générale .  
[
600] In the case of Caisse Centrale Desjardins, Selman invited the Court to look at the  
wording of a credit facility, another evergreen facility.  
592  
593  
594  
595  
596  
597  
598  
599  
600  
601  
Selman, May 20, 2009, pp.198-199  
Selman, May 20, 2009, pp.201-202  
Selman, May 20, 2009, p.202; Simon, April 8, 2009, pp.174-179  
Selman, May 20, 2009, p.204  
D-563  
Selman, May 20, 2009, pp.204-205  
Selman, May 20, 2009, p.206  
D-565  
Selman, May 20, 2009, pp.205-206  
Selman, May 20, 2009, pp.207-208; Selman, June 10, 2009, p.174  
500-05-001686-946  
PAGE: 127  
"
The nature of credit A will take the form of revolving loans for an initial period of  
twenty four (24) months to April thirtieth (30th), nineteen ninety (1990). During  
the credit period, the company will then retain the option to borrow, repay and  
reborrow any amounts. "  
"
Credit A may also be extended for additional periods of twelve (12) months by  
mutual agreement on April thirtieth (30th) of each year, evergreen option. Should  
credit A not be renewed at any one of the evergreen dates, the remaining credit  
period would be reduced to twelve (12) months."  
"
Credit period: this credit facility covers an initial period of twenty-four (24)  
602  
months with an annual evergreen option."  
6
03  
[
601] Selman added that the wording in the case of the $5 million loan was similar .  
602] He thereafter looked at the wording of the facility relating to the $10 million loan  
[
6
04  
to refinance existing indebtedness on the Toronto Skyline - which was, in his opinion,  
6
05  
the most relevant to the issue- and suggested that, in fact, it was a 5 year loan .  
"
The credit facility will be for a period of two (2) years to April thirtieth (30th),  
nineteen ninety (1990), but may be extended at Castor's option for a first renewal  
period of two (2) years from May one (1), nineteen ninety (1990) to April thirtieth  
(
30th), nineteen ninety-two (1992), and for a second renewal period of one (1)  
year from May one (1), nineteen ninety-two (1992) to April thirtieth (30th),  
nineteen ninety-three (1993)."  
[
603] Selman mentioned that the right to extend was subject to various conditions,  
namely that the ratio of first mortgage loan to value of the Toronto Skyline should not  
6
06  
exceed 60% and that the debt service coverage ratio should not exceed 1.1 to 1 .  
[
604] Based on the “evergreen stipulations”, Selman opined that Castor could not have  
less than 2 years outstanding at December 31, 1988, because if the facility was not  
extended by mutual agreement at April 30, 1989, Castor still had the right to use it until  
6
07  
April 30, 1990 .  
[
605] Selman acknowledged that looking at the working papers made it difficult to  
608  
and that he could not tell, from those AWPs, how and why the  
reach a conclusion  
6
09  
audit staff who had accepted the maturity changes had done so .  
602  
603  
604  
605  
606  
607  
608  
609  
D-567-1  
D-567-3  
D-567-4  
Selman, May 21, 2009, p.23  
Selman, May 21, 2009, pp.23-24  
Selman, May 21, 2009, p. 26  
Selman, May 21, 2009, p. 29  
Selman, May 21, 2009, pp. 40-41  
500-05-001686-946  
PAGE: 128  
[
606] Selman added that the notes themselves were short-term but only for the  
610  
purpose of allowing an adjustment of interest rates .  
CHIBV- Wh it e  
[
607] Vance opined that CHINBV’s notes to the White, which initially had maturity  
dates of 1989, were incorrectly changed to 1990.  
o There were three notes totalling 15 million.  
o These notes were not confirmed, but internal records of Castor indicated  
6
11  
February 22, 1989 as maturity date, in all cases.  
o On the lead sheet of the AWPs completed by the audit staff, C&L wrote  
«
As per Mr. Baenziger, all notes payable are of a current nature."6  
12  
o The reclassification was done by Ford further to written requests received  
6
13  
from Bänziger .  
o Except for the above mentioned written requests made by Bänziger, the  
AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
[
608] Selman opined that the changes were acceptable looking at Bänziger’s  
explanations:  
"
Customer number 949001, White deposits, totalling to Cdn $15 million are by  
special agreement due in 1990 only and not in 1989. Maturity date of 1989 is for  
interest calculation purposes only.6  
14  
"
since “it would be an odd thing for Mr. Baenziger to assert that the maturity date was  
6
15  
nineteen ninety (1990) if the notes were in fact due the day before his request.”  
616  
609] Selman acknowledged that he had not seen that “special agreement” and he  
617  
[
mentioned that he would have liked to see more information for the revision .  
CHIBV- Ga m ba zzi  
6
6
6
6
10  
11  
12  
13  
Selman, May 21, 2009, p. 32  
Vance, March 12, 2008, p. 129, PW-1053-92-7 and PW-1053-92-5 sequential page 91  
PW-1053-92, AA-51  
Three letters from Edwin Bänziger to George Dragonas dated February 22, 1989 (PW-1053-74-9),  
February 23, 1989 (PW-1053-74-12) and February 27, 1989 (PW- 1053-74-11)  
PW-1053-74-10, sequential page 34  
614  
615  
616  
617  
Selman, May 21, 2009, p.66  
Selman, May 21, 2009, p.67  
Selman, May 21, 2009, p.69; Selman, June 10, 2009, pp. 136 and following  
500-05-001686-946  
PAGE: 129  
[
610] Vance opined that CHINBV’s notes to Gambazzi, which initially had maturity  
dates of 1989 were incorrectly changed to 1990.  
o Those notes totalled 25 million.  
o All the confirmations showed 1989 maturity dates.618  
o On the lead sheet of the AWPs completed by the audit staff, C&L wrote  
619  
As per Mr. Baenziger, all notes payable are of a current nature. "  
«
o The reclassification was done by Ford further to written requests received  
6
20  
from Bänziger .  
o Except for the above mentioned written requests made by Bänziger, the  
AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
[
611] Selman testified that he could not find any explanation for the maturity change in  
6
21  
the case of the notes to Gambazzi in the amount of 25 million .  
[
612] Selman also said:  
I really have nothing to add to the paragraph6 . I've seen no support or  
explanation for the change in the Gambazzi deposit. It may be correct, it may not  
be correct. At the end, the only factual matter that I think you have to consider  
and give some weight to is that notwithstanding that all of these notes have due  
dates in nineteen eighty-nine (1989), the entire fifty (50) million dollars remained  
outstanding at the end of nineteen eighty-nine (1989) and there was still twenty  
22  
(
20) million of it outstanding at the end of nineteen ninety (1990). So, in fact, it  
623  
continued to be an outstanding amount, but I don't have any support for it.  
CHIBV- Pin ecr es t  
[
613] Vance opined that the maturity date change in the case of Pinecrest, from 1989  
to 1990, was incorrectly done.  
o No substantial audit was performed.  
6
6
6
18  
19  
20  
PW-1133A and Vance, March 12, 2008, p.130  
PW-1053-92, AA-51  
Three letters from Edwin Bänziger to George Dragonas dated February 22, 1989 (PW-1053-74-9),  
February 23, 1989 (PW-1053-74-12) and February 27, 1989 (PW- 1053-74-11)  
Selman, May, 20 2009, p.133  
621  
622  
623  
D-1295, page 294, para. 6.9.47  
Selman, May 21, 2009, p.67  
500-05-001686-946  
PAGE: 130  
o On the lead sheet of the AWPs completed by the audit staff, C&L wrote  
624  
As per Mr. Baenziger, all notes payable are of a current nature. "  
«
o The reclassification was done by Ford further to written requests received  
6
25  
from Bänziger .  
o Except for the above mentioned written requests made by Bänziger, the  
AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
[614] In a nutshell, on Pinecrest’s situation, Selman opined as follows:  
Information that we did have substantiated, strongly substantiated, the... or  
provided a foundation for the recommendations that Mr. Dragonas received from  
Mr. Baenziger that these deposits be considered for reclassification. Mr. Vance  
has some reservations respect to the three hundred thousand (300,000) US  
626  
deposit.  
6
27  
[
615] Selman indicated that when the note was paid it was paid to Pinecrest .  
CHIBV - Ba yer is ch e Ba n k  
[
616] Vance opined that the CHINBV’s liabilities (bank loans) to Bayerische Bank (total  
of $13.6 million) were incorrectly reclassified with a 1990 maturity date instead of a  
989.  
1
o Bayerische Bank confirmations indicated the following maturity dates:  
6
28  
January 9, 1989 and January 31, 1989 , as recorded in Castor’s own  
6
29  
records .  
o The reclassification was done by Ford further to written requests received  
6
30  
from Bänziger .  
o Except for the above mentioned written request made by Bänziger, the  
AWPs contain nothing that would show, or could show, why and how C&L  
proceeded to (or accepted) such a reclassification.  
o As a matter of fact, Castor did reimburse Bayerische Bank at the indicated  
6
31  
maturity dates in January 1989 , even before the audit was completed.  
6
24  
PW-1053-92, AA-51  
625  
Three letters from Edwin Bänziger to George Dragonas dated February 22, 1989 (PW-1053-74-9),  
February 23, 1989 (PW-1053-74-12) and February 27, 1989 (PW- 1053-74-11)  
Selman, May 21, 2009, pp.64-65  
626  
627  
628  
629  
630  
PW-145-A, Bates number 55919  
PW-1133A, at Bates 1545  
PW-805 and PW-807  
PW-1053-74-9, sequential pages 42 and 46 to 57  
500-05-001686-946  
PAGE: 131  
[
617] Selman opined that the change was acceptable in light of the stipulations of the  
6
32  
credit facility in force .  
"
The facility shall terminate on April 30, 1990."633  
CHIBV - Ber lin er Ba n k  
[
618] Vance opined that the CHINBV’s liabilities (Bank loans) to Berliner Bank (total of  
$
5.965 million) were reclassified with a 1990 maturity date instead of a 1989.  
o Berliner Bank confirmations indicated maturity dates in March, 1989. 634  
o CHIFNV’s original agreement with Berliner Bank provided that borrowings  
were for a maximum period of 6 months and for payments at maturity  
6
35  
date, absence of payment being an event of default .  
[
619] Selman opined that the change was acceptable in light of the wording of the  
636  
credit facility in force.  
"
The facility may be drawn and unless an event of default has occurred and is  
continuing before the date of such drawing, in amounts of no less than US $1  
million or the equivalent in other convertible currencies, for periods of one, three  
or six months, no period ending later than six months after the end of the  
availability period, i.e. March 5, 1990."6  
37  
For d ’s t es t im on y  
[
620] On September 6, 1996, Ford testified at length on the maturity matching issue,  
namely of the following facts:  
•
Bänziger wrote three letters (February 22, 1989, February 23, 1989 and  
638  
February 27, 1989) – copies of which were in the AWPs in front of her , but  
6
39  
she could not say how copies of those letters came into her possession - she  
could not say if those were handed to her – she could not say who would have  
6
40  
;
handwritten “To Maribeth” on the copy of the February 27, 1989 memo  
631  
632  
633  
634  
635  
636  
637  
638  
639  
640  
PW-805 and PW-807  
Selman, May 21, 2009, pp. 73 and following  
PW-1053-74, sequential pages 46-60 (namely page 50)  
PW-1133A, Bates number 1568  
PW-2924  
Selman, May 21, 2009, pp.75-79  
PW-1053-74, sequential page 58  
Ford, September 6, 1996, p. 133  
Ford, September 6, 1996, p.167  
Ford, September 6, 1996, p. 180  
500-05-001686-946  
PAGE: 132  
•
•
•
She made all the maturity changes that Bänziger was suggesting in his three  
641  
letters ;  
She neither verified with Bayerische Bank nor with Berliner Bank the proposed  
6
42  
change in maturities ;  
The only documentation she can show in support of any of the changes that  
were proposed and that she made are the letters received from Bänziger with  
6
43  
the attached documents ;  
•
•
For the Lambert loan, she reviewed her working paper on B-36 and noted that  
the 1987 interests had been paid in January 1989 – a fact that supported  
Bänzinger’s position that those amounts (interests) were current – she did not  
6
44  
ask for further documents ;  
In the Skyview review file, B-43, she noted that interest was generally payable  
monthly – that would be considered an amount in a current status. The only  
month that was outstanding was December. She did not trace payment to cash  
and she was not aware interest were paid through an increase of a loan made in  
6
45  
CHL ;  
6
46  
•
•
She could not recall any other procedure she would have performed ;  
She could not recall what information she had to reclassify in the Wood Ranch  
6
47  
; Wood Ranch loans had been confirmed with a maturity  
loan, but she did  
date of October 31, 1990 – she had so written into her AWPs after a verification  
6
48  
of the loan file ; she did not communicate directly with the borrower (DT  
6
49  
Smith) ;  
•
•
She acknowledged that instead of being repaid in 1989, the balances of the  
6
50  
loans to Wood Ranch increased during 1989 by almost 10 million ;  
She was not prepared to attest to the fact that the three letters and the attached  
documents from Bänziger were the only documents she saw – she maintained  
she would have seen other documents which would have allowed her to be  
satisfied that the classification recommended by the client was proper – she  
6
6
6
6
6
6
6
6
6
6
41  
Ford, September 6, 1996, pp. 133 and following  
Ford, September 6, 1996, p. 123  
42  
43  
44  
45  
46  
47  
48  
49  
50  
Ford, September 6, 1996, pp.129, 172, 178  
Ford, September 6, 1996, pp. 127-128  
Ford, September 6, 1996, pp.128-129  
Ford, September 6, 1996, p. 137, 171  
Ford, September 6, 1996, p.132  
Ford, September 6. 1996, pp. 137-138  
Ford, September 6. 1996, pp. 138-139  
Ford, September 6. 1996 p.141  
500-05-001686-946  
PAGE: 133  
could not remember specifically what other documents she would have seen –  
what questions she would have asked - she could not remember any procedure  
6
51  
she would have performed ;  
•
She acknowledged that there were neither documents in her file nor documents  
that she would have reviewed during the course of her field work that would  
have indicated that the maturity date for the Tennis Court Villas could be  
anything but 1990 – she said that if she had seen any such documents during  
6
52  
her field work, she would have changed the maturity date then ;  
•
•
She had no recollection of discussing the proposed changes of maturities with  
6
53  
Stolzenberg ;  
She acknowledged that Bänziger was the person who had represented to her  
colleague Janet Cameron that the maturity date for the White’s notes was 1989  
–
that Cameron’s work showed that (AWP : AA-51) and that the same Bänziger  
654  
was a few weeks later representing otherwise (maturity in 1990) ;  
•
•
Stolzenberg and Bänziger were provided with the drafts of the financial  
statements of the companies she was working on– she did not recall anything to  
the effect that they would have been disappointed in the maturities that were  
6
55  
reflected in Notes 2, 3 and 4 ;  
According to all the records she had, including the field work done, Gambazzi’s  
6
56  
notes were maturing in 1989 ; she never discussed that specifically with  
Gambazzi – she never had communication with Gambazzi concerning  
6
57  
reclassification of maturity .  
[621] At trial, on the maturity issue, Ford testified as follows:  
•
The maturity dates at note 3 brought forward for Castor overseas subsidiaries  
658  
reflected the date of the principal balance .  
•
When she performed her audit work, she was not aware that all records of actual  
6
59  
sales, including sales reports, were kept in Castor’s files in Montreal .  
651  
652  
653  
654  
655  
656  
657  
658  
659  
Ford, September 6, 1996, pp.129,131, 147,148, 149, 171  
Ford, September 6, 1996, p.149  
Ford, September 6, 1996, p. 144  
Ford, September 6, 1996, p. 170  
Ford, September 6, 1996, pp. 174-175  
Ford, September 6. 1996, p. 181  
Ford, September 6. 1996, p. 182  
Ford, December 10, 2009, pp. 87–91 (namely on page 91).  
Ford, December 8, 2009, p. 171  
500-05-001686-946  
PAGE: 134  
•
She was never advised that Ron Smith was the contact person for the DT Smith  
6
60  
loans .  
She never discussed the DT Smith projects with Ron Smith .  
6
61  
•
[
622] At trial and for the first time (in 2010), Ford maintained that she had received  
662  
further information and consulted other documents during meetings with Goulakos :  
Extracts of December 7, 2009  
Q-First of all, with respect to nineteen eighty-eight (1988) audit, when you came  
back in February nineteen eighty-nine (1989), did you go to Castor's premises?  
A- Yes, I did.  
Q- Okay. And when you went to Castor's premises, for what purpose did you go  
to Castor's premises and what did you do there?  
A-There were a couple of reasons I went to Castor's premises, one was to be  
able to interact with the Coopers & Lybrand team doing the Castor Montreal  
year-end file to clear off some of the intercompany balances that were required in  
completing my work, as well as any other information that might have not been  
available to me in Europe and that had been now sent to the offices that I could  
review on site.  
Q- When you say "to the offices", you're referring to?  
A- To Castor's offices in Montreal.  
(
…)  
A- (…) I had discussions with respect to Socrates Goulakos, with respect to the  
financial statement presentation of the statements that had been issued in  
draft to Herr Stolzenberg on February fifteenth (15th), nineteen eighty-nine  
(
1989), a draft set of financial statements was sent to the client.  
Subsequent to that, Herr Stolzenberg and Herr Baenziger had requested some  
changes that would be required or would be requested with respect to respect to  
those financial statements and for me to follow up on the presentation that was  
being requested, I had to sit down with Socrates Goulakos, discuss those  
changes and also be provided with supporting evidence for those changes.  
Q- And did they relate to areas such as maturities?  
A- Yes, they do. (…)  
660  
661  
662  
Ford, December 9, 2009, pp. 127-128  
Ford, December 8, 2009, 186-188; Ford, December 10, 2009, pp. 16-32  
Ford, December 7, 2009, pp. 186-226; Ford, December 8, 2009, pp.80-98  
500-05-001686-946  
PAGE: 135  
Q- And with respect to Mr. Dragonas, did you have any dealings or interactions  
with Mr. Dragonas?  
A- Not with Mr. Dragonas directly, no.  
Q- During any of those three years?  
A- No, I did not.  
Extracts of December 8, 2009  
Q-(…) and I'd like you to explain to the Court, the manner in which you  
proceeded to deal with these changes that appear in the letter of February  
twenty-second (22nd), twenty-third (23rd) and twenty-seventh (27th). (…)  
A- I would have had my working paper files that I had prepared in Europe with  
me. I would have looked at and we had the information that was being proposed  
as potential changes to classifications of the financial statements. I would have  
then looked and seen and gone through the various confirmations that I would  
have received from Geneva to see if any of those changes had been confirmed  
on a confirmation, yes or no, and then I would have sat down with this letter and  
George... Socrates Goulakos, and sat down with him in the offices of Castor in  
Montreal, to go through the proposed changes to the maturities, and there he  
would have had either documentation available to me at the time that I went on  
my first meeting, or he would have had to ask Herr Baenziger and Herr  
Stolzenberg for support with respect to those changes.  
Some of the evidence was provided with the original document that was sent by  
Herr Baenziger to Mr. Dragonas and Mr. Goulakos at the time, and some of that  
information would have been sufficient for my purposes and some of the points, I  
would have had to have followed up with Goulakos at the end of the... with each  
individual memo.  
Q- Okay. Now, when you're saying that some of the information was found in the  
communication that you received, you're referring to what?  
A- There are sequential pages that continue on from the original letter from  
Edwin Baenziger, 44, 45, 46, 47, 48, 49, all the way through to, I believe, 58, and  
those... and I believe Edwin Baenziger also mentions in his letter that he's  
included certain documents with that letter.  
(
…)  
Q-... these are confirmations that emanate from CH International Overseas.  
A- That's correct.  
Q- And these are the type of confirmations that were not generated by a  
computer?  
500-05-001686-946  
PAGE: 136  
A- They were typed by the client representative, yes.  
…)  
Q-Are you able to read it, because on the copies, they don't...  
A- It's under point 7.2, and it says: "The facility shall terminate on April 30, 1990."  
…)  
(
(
Q- Yes, I believe it's Bayerische Vereinsbank (inaudible).  
A- Yes. What it's stating is that the original confirmation that went out and  
contained a date that showed in nineteen eighty-nine (1989) as being the due  
date. However, he's showing evidence that the actual true maturity date is in  
nineteen ninety (1990), by showing... providing a copy of the actual loan  
agreement with respect to that particular facility.  
Q- Okay. And with respect to the Berliner Bank, which is sequential page 58, I  
note that the content is... the language used is German and this particular matter  
was being addressed to... First of all, is this a confirmation which is sequential  
page 58, or it's...  
A- No, this is correspondence with respect to... from the Berliner Bank to CHI  
International NV, with respect to a particular loan position, and he's basically  
sending them a signed copy of the changes made to the original agreement  
which was dated nineteen eighty-six (1986).  
Q- Okay. So, based on this, what is your understanding with respect to the  
maturity of the facility?  
A- On page number 59, sequential page 59, again, there's a highlighted before  
point number 8, "Representations", it says that for a period ending later than six  
(
6) months at the end of the (inaudible) period, i.e. March fifth (5th), nineteen  
ninety (1990).  
Q- And this is again also... it's the full agreement between... Yes. These are  
changes, these is a supplemental agreement number 2, so that's the full  
supplemental agreement number 2 with respect to that particular loan facility. So,  
these ones, he provided at the time that he sent the original fax to Mr. Dragonas  
and that was given to me at the time as a copy, so I have photocopied and  
maintained the whole package intact in the file.  
Q- And with respect to the remaining items that are dealt with on pages 1 or 2,  
which are sequential pages 41 and 42, as well as the following exhibits which are  
sequential page 39 and sequential page 38, how did you proceed and on what  
documentary evidence did you rely upon in order to accept the changes that  
appear on these documents?  
500-05-001686-946  
PAGE: 137  
A- I would have been at the offices of Castor in Montreal discussing these with  
Socrates Goulakos and he would have provided me with on-site documents  
relating to the specific recommendations for changes and classification that Herr  
Baenziger was proposing, and I would have reviewed those documents on site  
with Socrates Goulakos and noted that the changes were appropriate and  
therefore, made the changes to the notes 2, 3 and 4 of the financial statements.  
Q- Now, could you explain to the Court why you did not include in the audit  
working paper the documentary evidence that you consulted that allowed you to  
accept the changes shown on the documents that we have reviewed, the three  
(
3) separate... the two (2) letters and one (1) memo?  
A- It would be similar to when I was reviewing appraisals, where I didn't  
photocopy all the appraisals to support the numbers that I had inserted on the  
pages we looked at yesterday, I had seen the documents in front of me, I had  
read them, I was happy with the representations and the documents that were  
there, therefore I was comfortable to make the changes, and I also, if I ever  
needed to refer back to them, they were going to be maintained with the client,  
so if I ever needed further reference, they would be there for me to look at.  
Releva n t evid en ce - Ot h er elem en t s  
[
623] Ron Smith testified that neither he nor any members of his mortgage department  
ever met with any C&L representatives with respect to the loans to the DT Smith  
6
63  
companies, nor was he ever asked to provide them with any information .  
664  
[
624] Ron Smith described Castor’s involvement in the financing of Wood Ranch .  
He mentioned that the original commitment letter “included a cash flow which projected  
a sell-out date by July of nineteen ninety (1990), this is a typical twenty-four (24) month  
sales scenario”6 and he mentioned the delays in construction .  
65  
666  
[
625] Ron Smith confirmed that the maturity dates (for the purpose of Castor’s 1988  
667  
audit) had never changed .  
[
626] Ron Smith explained that there had been no closings as at February 12, 1990 in  
6
68  
the Wood Ranch project and that the Tennis Court Villas project was paid back out of  
6
69  
the process of the auction that took place in 1990 .  
663  
664  
665  
666  
667  
668  
669  
Ron Smith, June 10, 2008, pp.39-40  
Ron Smith, June 11, 2008, pp.39 and following  
Ron Smith, June 11, 2008, p.42  
Ron Smith, September 24, 2008, p.101; Ron Smith, March 27, 2009, pp.188-189  
Ron Smith, June 11, 2008, pp.46-47  
Ron Smith, June 11, 2008, pp.62-63  
Ron Smith, June 10, 2008, p.63  
500-05-001686-946  
PAGE: 138  
[
627] David Smith testified that while such a topic would have been part of his  
functions and responsibilities, he had never discussed maturity dates, extension of  
6
70  
maturity dates or advancing any maturity dates with anyone at Castor .  
[
628] David Smith confirmed that the project Wood Ranch II was also known as  
6
71  
672  
“
Village on the greens” . So did Moscowitz and Ron Smith.  
6
73  
[
629] Moscowitz described the Wood Ranch project looking at the compendium PW-  
1
118 relating thereto.  
[630] Moscowitz described his functions and responsibilities with DT Smith as follows :  
for each of the construction loans and land loans, developmental loans that DT Smith  
had with Castor, I would generally put together all of the information within the  
company about that property, which is where it was located, some marketing  
information, getting ready to do an appraisal and talk to an appraiser, and put that  
package together, and then meet with Ron Smith or Matt Hendel, and discuss the cash  
flows and the market, and together as a group we would put together a cash flow or  
6
74  
projection .  
[
631] Moscowitz explained that DT Smith refinanced the Wood Ranch project with  
Castor after delays in construction and a demand from their construction lenders,  
6
75  
Security Pacific Bank, that DT Smith finance the cost overruns they had to face .  
[
632] Moscowitz recognized David Smith’s signatures on the confirmations sent to  
676  
and he confirmed that there had been no changes in the  
CHIO for the 1988 audit  
6
77  
maturity date . Moscowitz also recognised the confirmations from DT Smith that had  
6
78  
been sent to CHIO for the purpose of the audit of the DT Smith companies .  
Cr ed ibilit y is s u e –For d ’s t es t im on y  
[
633] Given the striking difference between her testimony at discovery and her  
testimony at trial, Ford’s uncorroborated testimony at trial is neither credible, nor  
reliable.  
6
6
6
70  
71  
72  
David Smith, March 13, 2000, pp.72-73  
David Smith, March 17, 2000, p.742; David Smith, October 27, 2000, p.1507, 1552  
Moscowitz, December 14, 1999, p. 386-387; Moscowitz, December 17, 1999, p.1045; Ron Smith,  
June 11, 2008, p.44  
673  
674  
675  
Moscowitz, March 8, 2000, pp.1663 and following  
Moscowitz, December 13, 1999, pp 29-30  
Moscowitz, December 13, 1999, p.34,; Moscowitz, December 14, 1999, p.239; Moscowitz, December  
1
7, 1999, p.1043; Moscowitz, March 9, 2000, p.2063-2064  
676  
677  
678  
Moscowitz, December 13, 1999, p.103  
Moscowitz, December 14, 1999, p.385  
Moscowitz, December 14, 1999, pp.386-389  
500-05-001686-946  
PAGE: 139  
[
634] Ford was examined extensively on her work in recording maturities of loans  
during discovery in 1996. She was unable then to remember what she relied on or  
reviewed when making the changes, and it never came up that she would have had  
meetings with Goulakos in that respect.  
[
635] At trial, in 2010, almost 15 years later, and more than 20 years after the audit  
work was conducted, Ford asserted that Goulakos showed her documents, which  
justified these changes.  
[
636] Other examples of Ford’s credibility deficit are discussed later in the present  
judgment.  
[
637] Moreover, the evidence shows abundantly the poor quality of the Ford’s work–  
said evidence is discussed, hereinafter, under the GAAS sections of the present  
judgment.  
Cr ed ibilit y is s u e – Selm a n ’s p r op os it ion s  
[
638] Vance’s positions on the issue of maturity matching are accepted and those of  
Selman are rejected when they are different from Vance’s and here are the main  
reasons why.  
[
639] With respect to Wood Ranch and Tennis Court Villas, the propositions of Selman  
rest upon the following assumption:  
the projects were at the point, the stage, the point of sale, would be at the stage  
of point of sale in nineteen eighty-nine (1989), sufficiently... that would sufficiently  
support an expectation that the acceleration clauses would be triggered.6  
79  
[
640] Selman relied on the acceleration clause in the loan agreements to opine that  
there could be a “plausible explanation” for the changes made to the maturity dates  
6
80  
although Bänziger did not make reference to this clause in his letter to Ford.  
[
641] With respect to Wood Ranch and Tennis Court Villas, as with all situations  
relating to Castor’s overseas subsidiaries, Selman’s propositions are reliant on Ford’s  
testimony and on assessment of credibility and reliability of same.  
[
642] Cross-examination illustrated that Selman’s comment in his written report ““I will  
deal with the issues that this raises under Tennis Court Villas. My general comment  
6
81  
was likely to mislead. If Selman could rely on  
there have equal application here”  
evidence in the Tennis Court Villas situation , no similar evidence was ever seen by  
6
82  
679  
680  
681  
682  
Selman, June 10, 2009, p.149  
Selman, June 10, 2009, p.159  
D-1295, p. 283, para. 6.9.23  
D-169  
500-05-001686-946  
PAGE: 140  
him on Wood Ranch6 and, as the Court noted earlier in the present judgment, Selman  
83  
6
84  
did not testify viva voce, in direct examination, on the Wood Ranch situation .  
[
643] In cross-examination, with respect to the change made for Wood Ranch, Selman  
was asked what audit evidence he had seen that did not support the change and he  
answered he had not seen any:  
A- I didn't see any audit evidence that did not support the change685  
.
[
644] His answer “didn’t see any audit evidence that did not support the change” was  
followed by the following exchange :  
Q- (…) when you were doing your work, did you attempt to identify audit  
evidence that would be for a change, an audit evidence that would be against the  
change, or did you only look for audit evidence for a change?  
A- Well, obviously, I looked for all of the audit evidence that was available. I  
have not been selective about looking at audit evidence in this section or in  
any other section of this report. This isn't, you know, I'm trying to provide the  
Court with a balanced view of the situation6 (…)  
86  
[
645] Selman was asked if he had looked at the confirmations and his answer was  
“
Well, the audit confirmation requests are not very good evidence of maturity dates in  
6
87  
this circumstance” .  
646] He was asked if he had looked at Moscowitz’s testimony and his answer was “I  
[
don't think so. I didn't get that deeply into the D.T. Smith stuff, so I didn't read Moscowitz  
6
88  
or David Smith's testimony with respect to all these projects, so I can't say (…)”  
647] Selman was shown exhibit PW-1118-2B and was asked if he had looked at the  
[
mortgage loan summary section which stipulated “The maturity date shall be the later of  
6
89  
October 31, 1990 or the 27th month from the date of closing” .  
[
648] Selman was asked what steps the auditor should take when faced with a request  
to change the maturity date and his answer was “to make enquiry of the client as to the  
status of the development and to establish that the client had a reasonable ground for  
expectation that there would be a triggering of the acceleration clause in nineteen  
683  
684  
685  
686  
687  
688  
689  
Selman, June 10, 2009, pp.148 and following  
Selman, May 20, 2009 and Selman, May 21, 2009  
Selman, June 10, 2009, p.179  
Selman, June 10, 2009, pp.179-180  
Selman, June 10, 2009, p.181  
Selman, June 10, 2009, pp.181-182  
Selman, June 10, 2009, pp. 183-184  
500-05-001686-946  
PAGE: 141  
eighty-nine (1989)”,- i.e. to ascertain from the client the stage of development of the  
6
90  
project .  
649] Selman acknowledged that it would be based on the stage of development of the  
[
project that the auditor would be able to determine the likelihood of closings taking place  
6
91  
during 1989 . He also acknowledged that appraisal reports would constitute audit  
evidence if they contained an estimate of when the properties would be completed and  
6
92  
sold .  
[
650] Selman was presented with appraisal report PW-1118-5 dated September 26,  
1
988, showing that the project consisted then of rough-graded land and that  
construction had not even commenced except for model units. He was asked if that was  
a factor that made it less likely that there would be actual closings during 1989 (to  
trigger the acceleration clause). His answer was:  
I view it as neutral, totally neutral. That doesn't tell you anything one way or the  
other. You've got fifteen (15) months from the date of that appraisal to build out  
and complete a hundred and fifty-six (156) units townhouse project. That's, in my  
experience in construction, a relatively long period of time to do it6  
93  
.
[
651] Selman was presented with exhibit PW-1114-10 dated March 1989, which  
contains a section entitled “Construction status” (item 3) stating “"Foundations will start  
in approximately 45 to 60 days". He was asked if this piece of information would have  
affected his determination as to whether or not it was reasonable that there would be  
closings taking place in 1989. His answer was :  
I don't know. Somebody has written in here "When will first closings take place?  
August, 10 September?". I mean, this is California, there's no building season,  
things start and progress in a straight line, because there's no weather issues,  
unlike here, for example, or Canada generally. So, could they have completed  
these or not completed these, I can't tell you from this document6  
94  
.
[
652] Selman was presented with exhibit PW-1118-8, a document dated February 12  
990 establishing that 33 units had been sold but that none had closed (as of that date).  
1
He was asked whether he had taken that information into account in the course of his  
work to determine the plausibility of payments being made on the Wood Ranch II loans  
during 1989 in application of the acceleration clause. His answer was:  
And I'll give you the same answer that the documents I took into account did not  
include a detailed review of all the documents that existed in the D.T. Smith file of  
documents  
690  
691  
692  
693  
694  
Selman, June 10, 2009, p 186  
Selman, June 10, 2009, p.186  
Selman, June 10, 2009, p.186  
Selman, June 10, 2009, p.188  
Selman, June 10, 2009, p.202  
500-05-001686-946  
PAGE: 142  
(
…) I wasn't aware of that, that is correct. I wasn't aware of it when I wrote this  
695  
portion of the report.  
[
653] With respect to the Tennis Court Villas project, to support his views that the  
application of the acceleration stipulation should be considered, Selman referred to a  
6
96  
and made reference to units sold (46)  
memo dated September 11, 1989  
notwithstanding that only closings would trigger a repayment. As noted in that memo,  
only 3 units had closed. When Selman was asked why he had not mentioned in his  
report that only 3 units had closed, he said:  
My Lady, I looked at the document, there's a limit to how much detail about every  
exhibit I can put in a report, you know, if I tried to do that with every exhibit, pros  
and cons of an exhibit, I'd end up with a report that I couldn't possibly have  
prepared for you in the very busy time during the last summer when there was a  
strong amount of pressure from counsel to get a report to you because you  
wanted to read it over the summer. There's a limit to how much detail I can put in  
697  
it  
.
[
654] In both cases (Wood Ranch and Tennis Court Villas), Selman downplayed the  
698  
importance of third party evidence such as audit confirmations and failed to consider  
the testimony of Moscowitz and David Smith who were unaware of changes to the  
6
99  
maturity dates .  
Con clu s ion s  
[
655] Maturity dates, on both sides of the balance sheet - assets and liabilities- had to  
be the contractual due dates at year-end, not some random dates of expected future  
payment made after likely rollovers.  
[
656] Maturity dates on loans payable to Castor could not be changed unilaterally by  
Castor – Castor’s debtor had to agree. Ron Smith could not change the contractual  
rights and obligations of Skyeboat and 321351 Alberta, namely the maturity date, by  
7
00  
simply sending letters to those debtors .  
[
657] Castor could not reasonably expect Lambert to repay the interests in 1989 given  
the history of that file – as a matter of fact, evidence shows (as discussed later in the  
695  
696  
697  
698  
699  
700  
Selman, June 10, 2009, pp.202-205  
D-169  
Selman, June 10, 2009, pp.157-158  
Selman, June 10, 2009, p.181  
Selman, June 10, 2009, pp.181-182, 189, 204 and following  
D-573 and D-574  
500-05-001686-946  
PAGE: 143  
present judgment) that the payments that were made on the Lambert file in 1989 were a  
cash circle.  
[
658] Selman acknowledged that the changes requested by Bänziger required  
701  
corroboration : C&L neither looked for nor obtained corroboration.  
7
02  
[
659] In case of contradictory evidence, C&L had to resolve the inconsistency . C&L  
did not; C&L ignored its own audit evidence and acquiesced to management’s requests.  
[
660] The preponderance of evidence supports the conclusion that changes made by  
C&L to maturity dates were solely based on representations made by management,  
even in situations where management representations contradicted management’s  
7
03  
and the documentary evidence, including third party  
previous representations  
evidence gathered by C&L such as audit confirmations.  
[
661] By extending the due date of various liabilities beyond their actual due dates and  
advancing the due date of various receivables before their actual due dates, Castor  
improved its apparent liquidity position and this was falsely reflected in the audited  
financial statements for each of the relevant years.  
[
662] Castor intended Notes 2, 3 and 4 of the audited consolidated financial  
statements to provide information on the matching of current assets and current  
liabilities, which is critical to assess the liquidity and the solvency of a company.  
[
663] The assessment of liquidity focuses on the short-term, i.e., the year following the  
financial statements, and evaluates the ability of the company to meet its obligations as  
they become due and in the normal course of business.  
[
664] The effect of these changes was to further improve the liquidity position as  
shown in Notes 2, 3 and 4 to the financial statements.  
Liquidity improvements (100 million debentures)  
Positions (in a nutshell)  
Pla in t iff  
[
665] Plaintiff submits that:  
•
Castor’s audited consolidated financial statements for the year ending December  
3
1, 1988 were materially misleading and false as a result of the $100 million  
debenture transaction entered into by Castor in 1987. This transaction was a  
701  
702  
703  
Selman, June 10, 2009, pp. 170-172.  
PW-1419-1A, section 5300.20  
Bänziger’s comment to Janet Cameron noted in the AWPs.  
500-05-001686-946  
PAGE: 144  
circular transaction that had no commercial purpose and was simply a movement  
of Castor’s own money.  
•
•
The $100 million debenture transaction enhanced the information disclosed in  
Castor’s financial statements and artificially improved Castor’s liquidity and  
solvency: the loans made by CHIF to Foxfire (Liacon) and Morocco were shown  
as current loans receivables in the notes to the financial statements while the  
$
100 million of debentures were shown as long-term liabilities not coming due in  
the following year.  
This transaction led readers of the financial statements to believe that Castor had  
the ability to raise significant funds from arm’s length sources, when in fact this  
was simply a circular transaction employing Castor’s own funds.  
Defen d a n t s  
[
666] Defendants submit that:  
•
The sale of the $100 million debentures occurred in 1987. Although Castor’s  
obligation to repay the debentures when they fell due remained as a long-term  
liability on its financial statements thereafter, the transaction would be expected  
to be subject to audit tests in 1987. There are no allegations that the 1987 audit  
work was inappropriate. Defendants therefore submit that the Court must  
assume that the work was correct.  
•
In 1987, Castor issued two series of $50 million of debentures, one maturing in  
1
997 and the other in 2002, to a group of offshore entities. The funds raised were  
used to pay down an inter-company debt owed to CHIFNV, and reduce the  
withholding tax. Also in 1987, CHIFNV made a $75 million loan to Morocco  
Holdings (“Morocco”) and a $25 million loan to Foxfire. The actual transactions  
required a total of 43 cash movements, of which Castor itself was involved in 13,  
CHIFNV in 13, Castor Finanz in 8 and CHI (Cyprus) in 9. The evidence now  
shows that Gambazzi and his office were heavily involved in all aspects of this  
series of transactions, as well as subsequent transactions related to them.  
Gambazzi charged Castor $4 million for sourcing the funds. Plaintiffs’ experts  
now characterize this as a sham, asserting that there was no new money and  
that Castor’s funds were being circled. The $4 million fee was further circled  
within Castor, and $1.3 million of it was diverted to purchase a house for  
Stolzenberg.  
•
In 1988, before the year-end, the Foxfire loan was retired and the Morocco loan  
was reduced to $50 million. A new $50 million loan was granted by CHIFNV to  
Liacon, secured by a Gambazzi-in-trust back-to-back agreement. In 1991, the  
Liacon back-to-back security was replaced with a pledge of $50 million of  
debentures.  
500-05-001686-946  
PAGE: 145  
•
The 1987 working papers indicate that the debentures secured these two loans.  
The loan agreements have not been produced by the Plaintiffs. Although this  
demonstrates a relationship of some kind between the debenture-holders on the  
one hand and Morocco and Foxfire on the other, it does not imply, and C&L did  
not know (assuming that it is true) that all of these companies were related to  
Castor. In fact, in order for the tax planning to be effective, this could not have  
been the case. Moreover, by the time of the 1988 audit, only $50 million of  
debentures were pledged, for the Morocco loan. As far as C&L knew, the Foxfire  
loan had been paid out and Liacon was otherwise secured.  
•
•
The Court must determine what impact the above facts would have on the  
financial statements. As only some of the facts were known to C&L, to the extent  
that the Court determines that the financial statements would be materially  
different, the subsequent question arises as to whether C&L should have  
discovered additional facts through the application of ordinary GAAS.  
Vance provided two inconsistent options as to how this transaction should have  
been presented on the financial statements: on the one hand, he stated that  
Notes 2-4 should have been affected; on the other hand, he states that the  
transactions should have been eliminated entirely as they were shams.  
Evidence – The 100 million debentures  
Th e t r a n s a ct ion  
[
667] In a memo to Wolfgang Stolzenberg dated April 13, 1987, C&L responded to  
questions that Simon and Christa Karl, Castor’s employees, asked in relation to tax  
7
04  
advice regarding withholding taxes on interest paid on debentures .  
[
668] Further to the reception of this memo, Castor proceeded to issue 100 million of  
debentures.  
[
669] On June 25, 1987, CHIFNV transferred a total of $75 million out of its accounts,  
7
05  
charging this to Morocco Holding .  
706  
[
670] Castor issued 100 million of debentures to the following entities :  
•
•
•
Anstalt fur Montanbedarf, Vaduz (15 million)  
Anstalt Tomura, Vaduz (10 million)  
AG fur Buchprufungen und Treuhandwesen, Vaduz (6 million)  
704  
705  
706  
PW-1493  
PW-791 (bates #44420, 44626 to 44633); PW-789 and PW-790  
Marcinski, January 10, 1996, pp.152 and following; PW-1053-29, sequential page 84 (FF34)  
500-05-001686-946  
PAGE: 146  
•
•
•
•
•
Fondation Letor, Vaduz (6.5 million)  
Overnome Handels - Finanz-anstalt, Schaan (25 million)  
Mova Inc., Panama (12.5 million)  
Coeval Co. Inc., Panama (15 million)  
Mireta Ltd. Inc., Panama (10 million)  
[
671] Castor received $75 million from the debenture holders other than Overnome  
707  
between June 25 and June 29, 1987 .  
[
672] Castor Holdings Ltd. made three transfers to CFAG totalling $72.5 million as  
7
08  
follows :  
•
•
•
June 26, 1987: $25 million  
June 29, 1987: $27.5 million  
July 7, 1987 : $20 million  
[
673] The above amounts were recorded in CHL's general ledger account number 358  
709  
as a reduction of "Advance Payable - ZUG" .  
[
674] CFAG concurrently transferred the exact amounts it received from CHL to CHI  
(
Cyprus) which, again concurrently, transferred the exact amounts it received to  
710  
CHIFNV .  
[
675] CHIFNV made a payment to Foxfire Investments of $25 million on November 27,  
711  
987 . Also on November 27, 1987, CHL received $25 million which was recorded in  
712  
1
its books as having come from Overnome .  
[
676] On November 30, 1987, CHL transferred $18 million to CFAG and $2 million to  
713  
CHI (Cyprus) . The former amount was recorded in CHL's general ledger account  
number 358 as a reduction of "Advance Payable - ZUG" and the latter amount in  
7
14  
account number 360 as a reduction of "Advance Payable CH (Cyprus) .  
707  
708  
709  
710  
711  
712  
713  
714  
PW-94 (bates #250, 251)  
PW-1484-9-3-87, PW-1999 and PW-2000  
Part of PW-78  
PW-1484-9-3-87, PW-1999 and PW-2000  
PW-791 (bates #44420, 44626 to 44633), PW-789 , PW-790  
PW-94 (bates #240, 241)  
PW-2001  
Part of PW-78  
500-05-001686-946 PAGE: 147  
7
15  
[
[
[
677] CFAG transferred the $18 million to CHI (Cyprus) on November 30, 1987 .  
7
16  
678] CHI (Cyprus) transferred the $20 million to CHIFNV .  
679] CHL retained $7.5 million of the funds and CHIFNV disbursed $7.5 million more  
than it received, but, at the end of the day and on a consolidated basis, 100 million of  
current liabilities of Castor were moved to long-term debt.  
717  
[
680] Gambazzi received $4 million in commission related to this transaction  
without having done any work as no new money was raised. These fees ended up  
being circulated back to CHI (Cyprus) and CHIFNV and ultimately, in part, to  
7
18  
Stolzenberg for the purchase of a Westmount home .  
Th e t r a n s a ct ion a n d t h e 1 9 8 8 fin a n cia l s t a t em en t s  
[
681] Under the heading “Investments in mortgages, secured debentures and  
advances (notes 2, 3, 4 and 10)” of the assets section, the balance sheet included 100  
million of loans made by CHIF to Morocco and Liacon maturing within the year and  
7
19  
therefore presented as current assets . The total amount of the consolidated assets  
was $1,163,047 million.  
[
682] Under the heading “Debentures” of the liabilities section, the balance sheet  
included $100 million of long-term debt since, as written under note 6, $50 million of  
those debentures were maturing on June 30, 1997 and $50 million were maturing on  
7
20  
June 30, 2002 .  
Exp er t s ’ op in ion s  
[
683] Vance and Rosen opined that this was a circular transaction that had no  
721  
commercial purpose and was simply a movement of Castor’s own money .  
7
22  
Defendants’ expert Levi opined likewise .  
[
684] Defendants’ expert Selman admitted that, if the $100 million transaction was a  
723  
circular transaction, the financial statements were materially misleading .  
Conclusion  
7
7
7
7
15  
16  
17  
18  
PW-1484-9-3-87, PW-1999, PW-2000 and PW-2001  
PW-2001  
D-324-1, D-323-1, D-323-2, D-323-3, PW-791 (bates #44447)  
PW-1053-85 (page 35), PW-2304, D-325-1, PW-1199, PW-791, (bates #44780), PW-253, PW-253A,  
PW-791 (bates #44604, 44315)  
PW-5, tab 10  
719  
720  
721  
722  
723  
PW-5, tab 10  
Vance, March 12, 2008, p. 166; PW-3033, Vol. 1, pp. 70–71.  
D-1347, pp. 60-66.  
Selman, May 25, 2009, pp. 28-29.  
500-05-001686-946  
PAGE: 148  
[
685] The 100 million debentures transaction was a circular transaction. The financial  
statements were materially misleading.  
Undisclosed restricted cash  
[
686] Castor had an unclassified balance sheet in its 1988 financial statements which  
included the heading “Cash in bank and short-term deposits”.  
[687] Section 3000.01 of the Handbook, an italicized recommendation, provided:  
The following should be excluded from current assets:  
(
(
a) Cash subject to restrictions that prevent its use for current purposes;  
b) Cash appropriated for other than current purposes unless such cash  
offsets a current liability.7  
24  
[
688] Without any note disclosure, a reader of the financial statements would assume  
that the amount shown under the heading “Cash in bank and short-term deposits” was  
7
25  
all available and usable for general purposes .  
Positions (in a nutshell)  
Pla in t iff  
[
689] Plaintiff argues :  
Vance opined that USD $20 million were pledged to secure loans made  
•
by Credit Suisse Canada to Castor, in existence since 1985 and merely  
7
26  
rolled forward in subsequent years . Even if he could not refer to an  
actual pledge or other guarantee signed by Castor in favour of Credit  
Suisse with respect to 1988, since none could be located, Vance assumed  
such a pledge existed in light of the content of the written confirmations  
signed.  
724  
725  
726  
PW-1419-1, section 3000 “cash”  
Vance, March 13, 2008, p.29.  
Vance, March 13, 2008, p. 46.  
500-05-001686-946  
PAGE: 149  
•
Castor’s 1988 audited consolidated financial statements were materially  
misstated and misleading as a result of the non-disclosure of such  
7
27  
restricted cash .  
Defen d a n t s  
[690] Defendants argue:  
•
Selman opined that the returned confirmation of Credit Suisse Canada  
indicated that the collateral was a “Payment Obligation from CS London in  
the amount of $US 20,000,000”, indicating only that a guarantee was in  
place. He could not say that Vance was wrong in assuming that the  
pledge continued. In his report, he also wrote:  
If an error was made in that there was a pledge in 1988, it appears that its  
genesis lay in miscommunication by Credit Suisse to C&L in 1987 and in  
the possibility that there was not a completion of a request in respect of  
1
987 for information on what appeared to be a relatively immaterial  
matter. Another possible explanation is that Credit Suisse London had, in  
fact, unblocked the deposit. The existence in 1988 of a pledge may be  
728  
just an allegation  
.
•
There was no evidence of any such pledge, that the confirmations said no  
such thing and therefore Plaintiff had not discharged his burden of proof.  
Evidence  
729  
691] Prior to 1988, the audit evidence indicated that the deposits were pledged .  
[
1
985  
PW-1053-37-3 (…) sequential number 62 (…) the bank confirmation in nineteen  
eighty-five (1985) shows the loans again, there's one ten (10) million dollar loan  
and two (2) five (5) million dollar loans, and the nature of collateral lodged is  
described in this case as guarantee.  
And then the confirmation that was received by CH International Finance NV in  
the same year, nineteen eighty-five (1985), is PW-1053-97-2, at sequential page  
1
99. And in this case, it's in the form of a letter, (…) that the balances are shown,  
again the one ten (10) million dollars and two (2) five (5) million dollars, with a  
727  
728  
729  
Vance, March 13, 2008, pp.28-29; PW-2908A.  
D-1295-1, p. 326  
PW-1053-97, seq. p. 199; PW-1053-32, seq. p. 90; PW-1053-75, seq. p. 33  
500-05-001686-946  
PAGE: 150  
description as being fixed deposits blocked in favour of Credit Suisse Canada  
730  
Toronto  
…)  
986  
.
(
1
Q-Between nineteen eighty-five (1985) and nineteen eighty eight (1988), was  
there any changes in the situation of these funds?  
A- There were not insofar as nineteen eighty-six (1986) was concerned. (…)  
Eighty-six ('86) is PW-1053-32-1 (…)  
And for the twenty (20) million US of loans in Castor Holdings Limited, the  
collateral is shown is: "Pledge of funds US 20 million held at Credit Suisse  
London in the name of CH International".7  
31  
1
987  
And then in nineteen eighty-seven (1987), there is a slight difference in that the  
bank confirmation with respect to the Montreal audit is PW- 1053-30-5,  
sequential page 28, and it refers to (…)  
And then in nineteen eighty-seven (1987), as I inadvertently had mentioned for  
nineteen eighty-six (1986), it is nineteen eighty-seven (1987), PW-1053-30-5,  
sequential page 28, working paper 821, says: "Letter of guarantee for US 20  
million dollars until May 31st,1990.  
And then I say in nineteen eighty-seven (1987), there is an issue with respect to  
the confirmation that came in from CH International Finance... to CH International  
Finance from Credit Suisse, it's PW-1053-75-3, sequential page 33, in the form of  
a letter. (…)  
and it's in letter form again, it confirms that there's a nil balance in the current  
account. And number 2 is US two (2) million dollars: "Guarantee facility valid until  
st  
3
1 May, 1990, duly pledged by cash deposits."  
And in this instance, the auditors noted the difference. And on PW-1053-75-4,  
which is sequential page 11, again there's a letter from Mr. Bruce Wilson, the  
audit manager, to Mr. Edwin Baenziger, item 3, reading: "Bank confirmation from  
Credit Suisse, point 2, US dollars 2 million. According to our records, there are  
three deposits totalling US 20 millions, please advise."  
7
30  
Vance, March 13, 2008, pp.38-40  
Vance, March 13, 2008, pp.41-43  
731  
500-05-001686-946  
PAGE: 151  
So he... the auditor's understanding, of course, was that there was... the twenty  
(
20) million that was continued to be pledged. And then on P... the response from  
732  
.
Mr. Baenziger to that request is PW-1053-75-5, sequential pages 24 and 25  
[
692] The CHIFNV deposits with Credit Suisse London were confirmed for the  
733  
purposes of the 1987 audit and a confirmation letter was received from Credit Suisse  
7
34  
by C&L’s Geneva office. Geneva confirmed such  
London in respect of CHIFNV  
reception to C&L Montreal prior to their finalization of the audit .  
7
35  
[
693] The 1987 AWPs include a confirmation for a US $2 million guarantee facility - an  
obvious mistake since it should have been a $20 million guarantee facility -supported by  
7
36  
pledged deposits , received however by C&L Montreal after the audit was finalized  
and the consolidated audited financial statements for the year ending on December 31,  
7
37  
C&L sent a follow-up request for information to Bänziger but the  
1
987 were issued.  
AWPs do not indicate if and how the matter was resolved.  
[
694] Restricted cash was not disclosed in the 1987 consolidated audited financial  
statements.  
[
695] Prior to 1988, Credit Suisse London had been sent a standard confirmation form  
(
banking relationships form) but, in 1988, it only received a statement of open positions  
738  
form .  
[
696] In 1988, the bank confirmation from Credit Suisse Canada indicated that loans to  
Castor totalling US$ 20 million were subject to a «payment obligation from CS London  
in the amount of $US 20M»7  
39  
-
under "Loans, Other Direct Liabilities and Collateral Security", it lists three (3)  
loans of US amounts ten (10) million, and then two (2) loans of five (5) million,  
and it shows the collateral as being "Payment Obligation from CS London" in the  
amount of US twenty (20) million dollars7  
40  
.
[
697] Vance explained that “payment obligation” meant that Credit Suisse London had  
741  
made an obligation to pay Credit Suisse Canada 20 million dollars to secure the loan .  
[
698] The confirmation received in Europe from Credit Suisse London with respect to  
the deposits did not contain information relating to the guarantee.  
732  
733  
734  
735  
736  
737  
738  
739  
740  
741  
Vance, March 13, 2008, pp.43-45 (see also Vance, June 5, 2008, p.242)  
PW-1132A, bates 881, 883 and 884  
PW-1132B, bates 1101  
PW-1053-93, sequential pages 47-48  
PW-1053-75-3; see also D-1295-1, p. 323, para 6.12.02  
PW-1053-75, sequential page 35  
Vance, June 5, 2008, p. 246; see also PW-1133A, bates 1420  
PW-1053-23, seq. p. 27.; Vance, June 5, 2008, pp.228-229  
Vance, March 13, 2008, p. 37  
Vance, June 5, 2008, p. 245  
500-05-001686-946  
PAGE: 152  
•
The confirmation was a statement of open positions742 rather than a standard  
bank form as Bänziger, who had control of the confirmation process, elected to  
send such a form (a statement of open position) to Credit Suisse London.  
•
•
Levi testified that an auditor would expect a bank to disclose restrictions where  
7
43  
they exist .  
However, as Vance explained, through a statement of open positions, a bank is  
asked to confirm the amounts on deposit and the terms and the interest, but it is  
not requested to confirm collateral security, guarantees, contingent liabilities or  
any of the other information that auditors routinely expect banks to confirm or  
7
44  
turn their minds to .  
[
699] The 20 million loans that were still in existence at 1988 year-end were repaid by  
745  
Castor during 1989 .  
[
700] Wightman neither saw nor looked at the above various confirmations during the  
relevant years – he saw them, or some of them, for the first time during examination in  
746  
995 or 1996 .  
1
Conclusions  
[
701] The 3 loans, totalling twenty million dollars, existed from 1985 to 1989: this credit  
facility was valid until May 31, 1990.  
[
702] The 1985, 1986 and 1987 situations are not in dispute. The Court does not give  
credit to the suggestion made by counsel for the Defendants, based on propensity or  
possibility of human error by the bankers who were responding to these confirmations,  
that Credit Suisse Canada and Credit Suisse London got it wrong three years in a  
7
47  
row .  
[
703] In their written submission of July 8, 2010, Defendants wrote “The 1987 situation  
is not in dispute and the existence of a pledge can change from year to year”, an  
7
48  
concerning sections  
assertion supported by a reference to Selman’s testimony  
7
49  
6
.12.01 to 6.12.06 of his written report .  
7
7
7
7
7
7
7
7
42  
PW-1133A, bates number 1420  
43  
Levi, January 13, 2010, pp. 24-26  
Vance, March 13, 2008, p.46  
Vance, March 13, 2008, p.47  
Vance, June 5, 2008, pp. 253-254  
Vance, June 5, 2008, pp.231-232  
Selman, May 14, 2009 pp.65 to 67  
D-1295-1  
44  
45  
46  
47  
48  
49  
500-05-001686-946  
PAGE: 153  
[
704] The Court accepts the general proposition that the existence of a pledge can  
change from year to year. The Court acknowledges that the language used in the  
confirmations for 1988 was not identical to that of prior years.  
[
705] Nevertheless, since the loans totalling 20 million had not been repaid by Castor  
at year-end 1988, the Court finds that the proper interpretation of “payment obligation  
from Credit Suisse London in the amount of US twenty (20) million” in the 1988  
confirmation of Credit Suisse Canada (same amount and same bank as in the previous  
years), is that it had merely been rolled forward and the 20 million of cash was still  
restricted. Backstopping that payment obligation was a pending collateral security.  
[
706] Selman acknowledged that he could not say that the above conclusion was  
wrong.  
So Mr. Vance assumes that the nineteen eighty-seven (1987) pledge which he  
concluded existed continued, and as I said, I can't tell you he's wrong, but it's  
necessarily just an assumption on his part.  
So I guess the answer is left to you, My Lady, to decide whether the words  
"
payment obligation" means there was a pledge or just means that there was a  
750  
.
guarantee  
[
707] In the overseas file, a standard confirmation form was not sent, which explains  
that C&L only got partial confirmation (only confirmation of what was asked for in the  
statement of open positions). Had C&L asked about any restrictions or contingent  
liability, it would have received a confirmation of such restrictions or contingent liability.  
[
708] In the Pineridge litigation, Selman opined:  
«
1.14 The points to be raised in the confirmation request of a bank are well  
known to auditors. (…) the bank should be asked to confirm not only deposit  
balances but whether there was any contingent liability under the  
guarantee.» (emphasis added)  
751  
[
709] Knowledge and understanding gained in prior years clearly indicated that twenty  
million of deposits with Credit Suisse London had been pledged to secure the guarantee  
facility granted to Castor by Credit Suisse Canada valid until May 31, 1990.  
[
710] In those circumstances, the Court concludes that, at year-end 1988, US$20  
million of restricted cash on deposit with Credit Suisse London was not disclosed on  
Castor’s audited financial statements.  
7
50  
51  
Selman, May 14, 2009 pp. 68-69  
PW-3052  
7
500-05-001686-946  
PAGE: 154  
Undisclosed Capitalised interest and inappropriate revenue recognition  
General context  
[
711] Capitalized interest is interest earned on loans but not received in cash by Castor  
from its borrowers.  
[
712] Depending on the borrower and on the borrower’s situation, capitalization was  
done through a process of granting new loans, through drawdowns of amounts  
available under existing loan agreements, or simply through a process of increasing  
existing loans.  
[
713] In 1988, all capitalized interests (100%) were recognized as revenue in Castor’s  
audited financial statements.  
[
714] Defendants admit that a significant amount of Castor’s interest income was  
752  
capitalized and that they knew it .  
Issue  
[
715] Did GAAP require that the amount of capitalized interest revenue be separately  
identified in the financial statements, either as:  
•
•
•
a result of a specific Handbook recommendation;  
a result of general practice; or  
a result of an overriding principle of “fairness”?  
Positions (in a nutshell)  
Plaintiff  
[
716] Plaintiff says that there is a distinction between planned and unplanned  
capitalized interest. Capitalization of interest, especially the unplanned ones, is a “red  
flag” – a “warning signal” – something an auditor has to look at very carefully.  
[
717] Plaintiff reiterates that in Castor’s situation, in 1988, C&L had to deal with a  
material amount of unplanned capitalized interest, with multiple situations of non-  
compliance with loan covenants.  
752  
Defendants ‘plea, par. 103 and 139; Rosen, February 27, 2009 p. 209-210.  
500-05-001686-946  
PAGE: 155  
[
718] Plaintiff argues that Castor’s practice and quantum of capitalized interest should  
have been disclosed – it was material information. A number of provisions of the  
Handbook expressly or implicitly required or called for such disclosure:  
•
Section 1505, since the capitalization of interest was a significant accounting  
753  
policy, particularly with respect to revenue recognition ;  
•
Sections 1500.05 and 3850.03 combined, since the amount of capitalized  
interest was material and failure to disclose the amount resulted in misleading  
7
54  
statements and did not constitute fair presentation ;  
•
Section 1540, since a SCFP that disclosed the cash generated from operations  
was required while such a proper SCFP would have disclosed, at least, that  
Castor was generating virtually no cash from operations (i.e., the consequences  
of capitalized interest);  
•
•
Section 3020.10, since the assets were overstated because no provisions were  
taken to reduce the non-performing loans to estimated realizable value;  
Section 3400.06, since revenues were grossly overstated because they included  
interest receivable that was unpaid of which there was no reasonable assurance  
of collectability; and  
•
Section 3850, since the italicized recommendation (3850.03) reads as follows:  
“
The amount of interests capitalized in the period should be disclosed”.  
[
719] Plaintiff concludes that there was no reasonable assurance of the collectability of  
the interest and fees accrued for the loans connected to the projects that Plaintiff’s  
7
55  
and the minimum overstatements of revenue for 1988 was $56.8  
experts reviewed  
7
56  
million .  
Defendants  
[
720] Defendants say that there was no obligation to disclose the practice and  
quantum of capitalized interest.  
[
721] Defendants reiterate that an auditor could not oblige a client to make a disclosure  
that was not required by GAAP.  
[
722] Defendants submit that no separate fairness standard overrides GAAP. At best,  
in 1988, there was some debate in the profession and the majority of practitioners would  
753  
754  
755  
756  
PW-2908, Vol. 1, p. 4-D-3 to 4-D-5.  
PW-2908, Vol. 1, p. 4-D-5 to 4-D-8; PW-2370  
PW-2941, Vol. 1, p. 25, para. 2.4; PW-2908, Vol. 2, pp. A-6, B-1, G-17.  
PW-2908, Vol. 1, S-7 to S-10.  
500-05-001686-946  
PAGE: 156  
have reasonably concluded that the debate had been resolved in favour of there not  
being such a separate standard. When the debate was resurrected by the MacDonald  
7
57  
commission report and then again, after the Kripps decision, the CICA’s views were  
made very clear: no such separate fairness standard overrides GAAP.  
•
Prior to 1976, auditors had to give two opinions or what was commonly referred  
to as a “two-part” opinion: that the financial statements were in accordance with  
GAAP and that the financial statements were fair.  
•
•
After 1976, auditors had only a single opinion to give - there was no longer a  
separate “fairness” standard.  
Therefore, in 1988, C&L was not giving an opinion on fairness or truth in any  
absolute sense, but only giving an opinion on fairness in accordance with GAAP.  
[
723] Defendants mention that although certain Canadian jurisdictions had “caught up”  
with the change made to the content of the audit report in 1976 and most company  
legislation had adopted the “present fairly in accordance with GAAP”, the one part  
opinion, by 1988 not all legislatures had done so. British Columbia had not– its  
7
58  
legislation still required a two-part opinion. As the audit client in the Kripps case was  
7
59  
organized under British Columbia law , this case had to be looked at accordingly  
taking into account that the applicable New Brunswick law under which Castor was  
incorporated did not contain a similar provision for a two part opinion.  
[
724] Defendants assert that section 3850 of the Handbook only addressed capitalized  
interest expense.  
[
725] Defendants argue that the words “Generally Accepted” in the acronym “GAAP”  
are meaningful. The Handbook states that where it is silent, GAAP includes, among  
other things, other accounting principles that are generally accepted by virtue of their  
use in similar circumstances by a significant number of entities in Canada. Looking at  
what others did during 1988 is therefore relevant.  
[
726] Defendants say that the distinction between planned and unplanned capitalized  
interest is artificial: nothing in the Handbook even hints at a requirement for a pre-  
7
60  
existing contractual agreement to defer interest .  
[
727] Defendants mention that Castor fully intended to capitalize the interest while the  
developer’s operations were generating operating losses on the basis that the  
underlying property values could be realized upon completion of their development and  
refurbishment. In Castor’s case, payments of interest (monthly or quarterly) were called  
757  
758  
759  
760  
Kripps v. Touche Ross & Co., 1997 CanLII [2007] (BC C.A.)  
Kripps v. Touche Ross & Co., 1997 CanLII [2007] (BC C.A.)  
PW-2370-3 p. 32 starting at line 22  
Selman, May 8, 2009 p.161-163  
500-05-001686-946  
PAGE: 157  
for in some loan contracts simply to permit Castor to put the borrower in default if it  
determined that to do so was in its best interests, and to allow for appropriate  
compounding of the interest.  
[
728] Defendants assert that capitalized and accrued interests in 1988 were ultimately  
collectible, but had it been determined that they would not be, Castor would have had a  
choice to either reverse them or to set up a compensating loan loss provision.  
Evidence  
Exhibits and lay witness’ evidence  
7
61  
[
729] In a brochure of 1988, Castor was describing its business as follows :  
Since its inception, Castor has focused on short and medium term loans in the  
North American mortgage market. These investments have been for its own  
account, as well as on behalf of a growing international clientele.  
Castor’s preferred investments are first and second mortgage interim loans on  
income producing properties (i.e. office, commercial, hotels, industrial and  
apartment buildings), well located in major urban areas, Castor’s primary  
investment activities include:  
•
Purchase and placement of first and second mortgages for terms  
between six months and two years;  
•
Interim financing for construction and development secured by mortgages  
and take-out commitments.  
(
…)  
During 1987, the Company placed mortgage loans of about $250 million in  
Canada and the United States, which were refinanced in Europe and Canada.  
Castor currently administers directly or in trust for its clients, mortgage loans in  
excess of $800 million. All proposed investments are reviewed and thoroughly  
evaluated by Castor’s experienced personnel, prior to commitment. Underwriting  
standards are high and, in addition, particular attention is given to the Company’s  
policy that loans are not to exceed 75% to 80% of the estimated market value.  
Careful attention is also paid to asset and liability matching and maturities in  
order to provide funding stability7  
62  
.
[
730] In reality, Castor’s business was quite different:  
7
61  
62  
PW-1057-1  
7
PW-1057-1, page 4  
500-05-001686-946  
PAGE: 158  
•
A significant amount of loans were not secured by mortgage on real  
estate;7  
63  
•
Castor was renewing loans year after year since it had no other choice but  
to do that - in fact, Castor had slowly but clearly moved from short and  
medium-term loans to long-term loans;  
•
The income producing properties were not making their own costs and  
7
64  
Castor had to finance them ;  
•
•
“Interim financing” was not really taking place;  
Unplanned capitalized interest represented a significant amount of the  
$
250 million of loans placed by Castor in 1987 – such loans were not  
made as the result of proposed investments reviewed and thoroughly  
evaluated through high underwriting standards before commitment –  
Castor had no choice but to make them since its debtors could not pay  
their debts;  
•
•
Castor had no underwriting standards;  
In fact, and in many instances, Castor did not comply with its advertised  
lending policy – Castor’s loans did exceed the 75% to 80% of the  
estimated market value.  
[
731] The books and records provided to C&L, in Montreal and overseas, disclosed the  
nature of Castor’s loans and the fact that very little cash – if virtually no cash- was being  
paid by Castor’s borrowers.  
Pla n n ed a n d u n p la n n ed ca p it a liza t ion  
[
732] The distinction between planned and unplanned capitalization of interest and the  
characterization of the latter as a “warning signal” was made as follows in the Estey  
Report in 1986 under the heading “Significant Bank Accounting Principles”.  
Capitalization of interest refers to the advance of money by the bank to the  
borrower to enable him to pay the interest on his loan from the bank. Interest  
may be capitalized pursuant to the original loan agreement, or on an  
unplanned basis. Capitalization is planned where the bank and customer do not  
expect a revenue stream sufficient to service the loan to develop immediately.  
The most common example is the real estate development loan. It is common  
7
63  
64  
PW-2893-24; Gourdeau, January 17, 2008, pp.164 and following ; Gourdeau, February, 20, 2008, pp.  
4 and following  
MLV, CSH, TSH, OSH, Meadowlark  
7
7
500-05-001686-946  
PAGE: 159  
and acceptable practice to include in such loan contracts provision for funds  
sufficient to pay interest during a defined period. Unplanned capitalization of  
interest, on the other hand, is considered to be a warning signal, because it  
indicates the borrower’s inability to meet its loan obligations, perhaps in  
765  
the long term . (our emphasis)  
7
66  
[
733] In various situations , Castor and the borrower intended the interest to be paid  
upon completion, refinancing or sale: then, the agreements indicated a common intent  
7
67  
between the two contracting parties to capitalize the interest - the capitalization was  
7
68  
planned . It was the case for the certain loans relating to the MEC project, a fairly  
substantial real estate project that could take some time to complete.  
•
•
The Bank of Montreal, the first mortgage creditor, did not tolerate interest  
capitalization on its loan but it had required that the interest on Castor’s loans to  
7
69  
YHDL and MEC be capitalized .  
Castor’s MEC loan documents called for capitalization, including simple  
capitalization or the establishment of an interest reserve as part of the loan  
7
70  
facility .  
[
734] However, huge amounts of Castor’s capitalized interest were unplanned  
capitalized interest further to non-compliance with loan covenants; they were,  
nevertheless, recognized as revenue.  
C& L in t er n a l m a t er ia l  
[
735] In its internal policies, C&L directed its professionals to take into account the  
771  
recommendations of the MacDonald Commission .  
[
736] As well, in its permanent files for the Castor audit, C&L maintained a copy of US  
case law (predating the relevant years) that questions «whether the [audit] report fairly  
presents the true financial position…» and cited the following principle: «Fair  
presentation is the touchstone for determining the adequacy of disclosure and financial  
7
65  
66  
PW-1422A, p. 607 (OSR #15 dismissed);.  
7
Vance, May 28, 2008 p. 127-142. These included: CSH - PW-1087-4 and PW-1087-5; the back-to-  
back loans; the Skyline loans - PW-1053-12-1 sequential p. 90, D-575, p. 1 items 3a and 3b (the  
pricing was based on a 5-year term) PW-167x, PW-167v ; MLV(interest was capitalized via loans in  
Europe); see also TWDC - PW167cc – p. 2; TWTC – PW-1053-23-7 p. E-107; Ron Smith,  
September. 17, 2008, p. 19-20, 24, 98-100  
767  
768  
769  
770  
771  
Vance, May 28, 2008, p.143-144  
Vance, May 28, 2008, pp. 125-127  
PW-1102A-5, see definition of Development Costs (p. 7), Articles 2.02, 2.07 and 12.01(d)  
Vance, April 10, 2008 p.19-23, re loans 1100, 1101/03 and loan 1109  
PW-1420, Tab 28, re: T&T 125, pp. 1-2.  
500-05-001686-946  
PAGE: 160  
statements. While adherence to generally accepted accounting principles is a tool to  
7
72  
help achieve that end, it is not necessarily a guarantee of fairness» .  
C& L’s p eer r eview (Ca s t or ’s 1 9 8 7 a u d it )  
[
737] C&L’s peer review of the 1987 Castor audit was done internally by Higgins and  
773  
Carvell, partners of C&L who wrote in their report:  
From the loan review sheets it is not clear that C&L has checked the information  
gathered to supporting documentation. The sheets also do not address the  
question of whether the client is up to date with their review of the debtors’  
financial position or has complied with all loan covenants7  
74  
.
[
738] In the same report, peer reviewers Higgins and Carvell made the following  
recommendation “Consideration should be given to revising the loan review sheets  
7
75  
used in conjunction with those currently in use on bank audits” .  
[
739] Even though Wightman wrote to Higgins and Carvell that he would consider it for  
776  
(“should be done for 1988”), the recommendation was not  
the 1988 audit  
implemented.  
Ca p it a lized in t er es t a n d t h e a u d it t ea m s  
777  
740] The issue of capitalized interest was a “hot topic” for the audit and an area of  
778  
[
risk for the audits , and C&L staff brought forward to Wightman the fact that very  
7
79  
material amounts of interest were being capitalized .  
[
741] Remarkably Wightman testified that he had no idea whether the percentage of  
780  
the reported figure of revenue represented 10% or 90% of capitalized interest .  
Sect ion 1 5 0 0 .0 5  
[
742] In the October 1972 CA Magazine issue, auditors can read as part of an article  
titled “Research – CICA Handbook – new research recommendations” edited by  
7
81  
Gertrude Mulcahy, FCA, Director of research, CICA: :  
7
7
7
7
7
7
7
7
72  
73  
74  
75  
76  
77  
78  
79  
PW-1053-63C, seq. pp. 53-71, at p. 57.  
PW-1420-1A, TPS-A-213  
PW-2590, page 3, paragraph 5h (also in PW-1053-21, sequential pages 352-355 and PW-1426)  
PW-1053-21, sequential pages 352-355; PW-1426 and PW-2590  
PW-2590, page 3, paragraph 5h (also in PW-1053-21, sequential pages 352-355 and PW-1426)  
Mitchell, April 24, 1996, pp.81-82  
PW-1053-13, sequential page 180  
Mitchell, April 24, 1996, pp.130-132: PW-1053-17, sequential page 10; PW-1053-3, sequential page  
4
76  
780  
81  
Wightman, October 10, 1995, pp. 45–46.  
D-519  
7
500-05-001686-946  
PAGE: 161  
Release No. 8 of Revisions to the CICA handbook will be mailed shortly to  
members and other subscribers. This release includes a new section in the  
Research Recommendations division of the Handbook – Section 3050, “long-  
term Intercorporate Investments” – as well as revisions to a number of other  
sections necessitated by the new Recommendations. Revisions to two other  
sections are also provided. (…)7  
82  
Other section amendments  
Handbook Revisions – Release No. 8 also included some amendments to  
existing material which did not arise as a result of the new Section 3050.  
Section 1500- General Standards of Financial Statement Presentation  
A new recommendation has been incorporated in this section to make it clear  
that information provided outside the financial statements (which includes notes  
and supporting schedules to which the financial statements are cross-referenced)  
783  
cannot be considered an integral part of “fair presentation”. (emphasis is part  
of the original text)  
[
743] In “Principles of auditing”, second Canadian edition 1983, Meigs writes:  
«
The meaning of the expression “present fairly” as used in the context of the  
auditor’s report has been much discussed in court cases and in auditing  
literature. Some accountants believed that financial statements were fair if they  
conformed to GAAP; others insisted that fairness was a distinct concept, broader  
than mere compliance with GAAP. This discussion led to an earlier CICA  
recommendation of a “two-part” opinion; that is, “present fairly” and “in  
accordance with GAAP” were to be judged separately. However, the CICA  
subsequently changed its recommendation and now takes the position that the  
judgment on “present fairly” can be applied “only within the framework of  
generally accepted accounting principles”. In the opinion of the authors, the  
essence of the CICA position is to equate the quality of presenting fairly with  
that of not being misleading or not being materially misstated. Financial  
statements must not be so presented as to lead users to forecasts or conclusions  
784  
that a company and its independent auditors know are unsound or unlikely».  
emphasis is part of the original text)  
(
[
744] In “The external audit”, second edition 1984, Anderson’s arguments against a  
separate and abstract standard of fairness include the following:  
1
. Effective communication requires agreement between sender and receiver as  
to a common language in which the communication will be expressed. GAAP  
provide that language. The reader can then interpret “fairly” in the non-technical  
782  
783  
784  
D-519, p.64  
D-519, p.67  
PW-3053-1, p. 29.  
500-05-001686-946  
PAGE: 162  
sense of “not misleading”, but only in relation to an identifiable standard such as  
GAAP (…)  
5
. Concerns that GAAP represent a set of overly rigid and mechanical rules are  
exaggerated. Accounting pronouncements in Canada (as compared with the  
U.S.) are usually expressed in general, rather than very detailed, terms. The  
Introduction to Accounting Recommendations states:  
In issuing Recommendations, the Accounting Research Committee recognizes  
that no rules of general application can be phrased to suit all circumstances or  
combination of circumstances that may arise nor is there any substitute for the  
exercise of professional judgment in the determination of what constitutes fair  
presentation or good practice in a particular case.  
(
…)  
Furthermore, application of the auditor’s professional judgment is also required in  
assessing compliance with the following very general Recommendation:  
Any information required for fair presentation of financial position, results of  
operations, or changes in financial position, should be presented in the financial  
statements…  
6
. This position is consistent with the present position in the U.S.  
The independent auditor’s judgment concerning the “fairness” of the overall  
presentation of financial statements should be applied within the framework of  
generally accepted accounting principles. Without that framework the auditor  
would have no uniform standard for judging the presentation…7  
85  
[
745] In the same publication, under the subtitle “The fairness standard within GAAP”,  
Anderson writes:  
Attention to fairness in applying GAAP involves the exercise of care and  
judgment in several critical areas:  
(
…)  
5
. assessing whether disclosure is adequate; that is, whether it includes all  
information required for fair presentation (…)  
8
. identifying circumstances where the spirit, rather than the letter, of the  
786  
.
recommendations should prevail  
[
746] The MacDonald commission’s report published in June of 1988 states at  
paragraph 3.45:  
7
85  
86  
PW-1421-22, pp. 553-554.  
PW-1421-22, pp. 554-555  
7
500-05-001686-946  
PAGE: 163  
In an ideal world, the accountability framework and GGAP would be well thought  
out and comprehensive, so that their application in an honest manner would  
almost inevitably provide the information that users need to know. But auditor  
must know that we do not live in a perfect world. There are, and probably always  
will be, ambiguities and lack of completeness in GAAP. The auditor is expected  
to have a good sense of the basic concepts of fair presentation. He or she should  
be aggressive in seeing that they are applied, notwithstanding the absence or  
lack of clarity of guidance and, if not satisfied, the audit report should be  
qualified. This is particularly so when accounting is proposed that appears to be  
unreasonably optimistic. Users of financial information will be much more critical  
of accounting practices that paint an unwarranted picture of prosperity than of  
accounting that proves to have been conservative. An auditor needs an acute  
sense of danger. If the auditor encounters a dubious accounting presentation and  
has a sense of danger, we are confident that grounds will exist for qualification of  
787  
the audit report.  
[
747] The CICA research study entitled “Professional judgment in financial reporting”,  
published in 1988, states authors Gibbins and Mason:  
STATEMENTS AS A WHOLE COMPLYING WITH GAAP  
Is it possible for each of the transactions comprising a set of statements to be  
recorded and disclosed in accordance with GAAP, but for the statements as a  
whole to be deemed not to comply with GAAP? Depending on how one interprets  
CICA Handbook paragraph 1500.05, the answer may be “yes” That paragraph  
states:  
Any information required for fair presentation of financial position, results of  
operations, or changes in financial position, should be presented in the financial  
statements…  
Since there is no indication as to what is meant by “fair presentation” not any  
criteria for assessing it, it would be quite possible for the statement preparers or  
auditors to deem, in their judgment, certain information to be required for it even  
though such information is not required either by the Handbook or by other  
788  
sources of GAAP.  
[
748] The staff of the Assurance Standards Department at the CICA issue, in  
September 2001, a non-authoritative bulletin, a practice advice (issue 9), which includes  
the following comment:  
The AcSB also proposes to reword CICA Handbook- Accounting paragraph  
1
500.05 to clarify its original intent when it was first introduced into the CICA  
Handbook – Accounting. That intent ensures that all information necessary to  
comply with GAAP is included in the financial statements (including notes to such  
statements and crossed-reference supporting schedules), rather than other  
7
87  
88  
PW-1432A, p. 50, para. 3.45.  
PW-2917, p. 126.  
7
500-05-001686-946  
PAGE: 164  
documents. Some parties have misinterpreted current wording to require a  
separate consideration of fairness7  
89  
.
[
749] In October 2003, further to an exposure draft and usual proceedings relating  
790  
thereto, Section 1400 comes into force . It namely provides for the following italicized  
recommendations (1400.03 and 1400.09) and non-italicized paragraphs (1400.04 and  
1
400.05)  
1
400.03 Financial statements should present fairly in accordance with Canadian  
generally accepted accounting principles the financial position, results of  
operations and cash flows of an entity (that is, represent faithfully the substance  
of transactions and other events in accordance with the elements of financial  
statements, and the recognition and measurement criteria set out in FINANCIAL  
STATEMENT CONCEPTS, Section 1000).  
1
400.04 A fair presentation in accordance with generally accepted accounting  
principles is achieved by:  
(
a) applying GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section  
100;  
1
(
b) providing sufficient information about transactions or events having an effect  
on the entity’s financial position, results of operations and cash flows for the  
periods presented that are of such size, nature and incidence that their  
disclosure is necessary to understand that effect; and  
(
c) providing information in a manner that is clear and understandable.  
1
400.05 An entity exercises professional judgment to provide sufficient  
information about the extent and nature of transactions or events having an effect  
on the entity’s financial position, results of operations and cash flows for the  
periods presented that are of such size, nature and incidence that their  
disclosure is necessary to understand that effect.  
This information would include the significant terms and conditions of such  
transactions, as well as the nature of such events and their financial effects on  
the periods presented.  
1
400.09 Financial statements, including notes to such statements and supporting  
schedules to which the financial statements are cross-referenced, should include  
all information required for a fair presentation in accordance with generally  
accepted accounting principles.  
7
89  
D-520, pages 3 and 4  
D-659-1 (re:4.4.08) B  
790  
500-05-001686-946  
PAGE: 165  
[
750] The CICA publishes a document entitled “General Standards of Financial  
Statement Presentation – Background Information and Basis for Conclusions Section  
1400” where one reads:  
FAIR PRESENTATION  
2
3
“Fair presentation” is difficult to define unless expressed in terms of  
compliance with standards. Accordingly, the AcSB decided to amend GENERAL  
STANDARDS OF FINANCIAL PRESENTATION, Section 1500, to clarify that  
“
fair presentation” is not a separate consideration from whether financial  
statements are in accordance with generally accepted accounting principles.  
2
4
A first step in this clarification was taken initially by proposing to reword  
former GENERAL STANDARDS OF FINANCIAL STATEMENT  
PRESENTATION, paragraph 1500.05 (now GENERAL STANDARDS OF  
FINANCIAL STATEMENT PRESENTATION, paragraph 1400.09), to clarify its  
original intent when it was first introduced into the CICA Handbook – Accounting.  
That Intent ensures that all information required to be disclosed by GAAP is  
included in the financial statements (including notes to such statements and  
cross-referenced supporting schedules), rather than other documents. Some had  
misinterpreted the former wording to require a separate consideration of fairness.  
2
5
After the initial proposals, some questioned how the overall fairness of  
presentation of financial statements would be assessed. Also, some additional  
comment letters expressed the view that it is important to “step back” and  
consider whether the financial statements as a whole present fairly in accordance  
with GAAP the financial position and results of operations of an entity. They  
proposed that merely complying with the various presentation and disclosure  
requirements specifically identified in the CICA Handbook – Accounting might not  
be sufficient. They believed that the spirit of GAAP also needed to be taken  
into account.  
2
6
The AcSB concurs that it is always necessary, but in some cases  
not sufficient, to follow the minimum requirements of GAAP and that an  
entity should “step back” and consider whether its financial statements are  
presented in a manner that provides clear and understandable information to  
users of financial statements. In particular, this applies to the manner in which  
notes to the financial statements are presented – so as to be informative and  
useful, rather than merely providing “boilerplate” information. However, the AcSB  
believes that this should be restricted to an assessment of whether “fair  
presentation in accordance with GAAP” has been achieved, rather than whether  
fundamental recognition or measurement requirements should be compromised.  
2
7
The AcSB proposed to clarify this matter by introducing a new  
paragraph .04, which explained that a fair presentation in accordance with  
generally accepted accounting principles requires not only applying  
accounting policies that are in accordance with GENERALLY ACCETED  
ACCOUNTING PRINCIPLES, Section 1100, but also assessing whether there  
are transactions, circumstances or events of such size, nature or incidence that  
500-05-001686-946  
PAGE: 166  
their disclosure is necessary to understand the entity’s financial position,  
results of operations and cash flows. (…)  
3
3
Paragraph 1400.09 (former GENERAL STANDARDS OF FINANCIAL  
STATEMENT PRESENTATION, paragraph 1500.05) continues to require that  
financial statements are cross-referenced to any notes and supporting  
schedules. It has been notes that US GAAP does not require such cross-  
referencing. However, the AcSB believes that this results in better presentation  
and has retained this requirement.  
(
emphasis added by the undersigned)  
Sect ion 3 8 5 0  
[
751] The Exposure Draft7 that preceded the adoption of section 3850 of the  
91  
Handbook dealt solely with capitalization of interest expense. The underlying research  
proposal and the Statement of Principles leading to the Exposure Draft similarly dealt  
solely with such expense. The responses to the Exposure Draft, all part of the public  
record, centered almost entirely on such expense; only three mentioned an extension of  
it to interest revenue.  
[
752] Historically, when there had been a major change between an Exposure Draft  
and the final wording contemplated, the concerned section had been re-exposed. At the  
time section 3850 of the Handbook was adopted, Vance was puzzled by the lack of re-  
7
92  
exposure .  
[
753] After section 3850 was adopted, CA Magazine published an article describing  
the process, the responses which had been received and the ultimate resolution of any  
issues that had been raised. The article contained the following passage under the  
heading “Defining terms”:  
The Committee decided that, for Section 3850’s purposes, interest capitalized  
would simply be the amount not otherwise expensed as interest in the income  
statement under an enterprise’s existing accounting policy7  
93  
.
Th e a u d it r ep or t over t h e yea r s  
[
754] Prior to 1976, auditors were required to give two opinions or what was commonly  
referred to as a “two-part” opinion:  
•
•
that the financial statements were in accordance with GAAP; and  
that the financial statements were fair.  
791  
792  
793  
PW-1423  
Vance, April 16, 2008, p.140-142  
D-487-2, bates # 000063  
500-05-001686-946  
PAGE: 167  
[
755] The version of the 1988 opinion was introduced in 1976, a change explained in  
7
94  
the Handbook as follows :  
“
The material now indicates that the auditor formulates his opinion within the  
framework of generally accepted accounting principles whereas the material  
which has been replaced – paragraphs 5500.01 to .08 indicates that the auditor  
expresses his opinions as to whether the financial statements: 1) present fairly  
and 2) were prepared in accordance with generally accepted accounting  
principles.”  
Wh a t ot h er s d id  
[
756] Vance could not produce and was not aware of any financial statements of any  
lender from 1988 to 1990 that specifically disclosed the amount of capitalized interest  
7
95  
revenue, either as a note or as a separate line item .  
[
757] Selman conducted broad-based research and brought all the results to the  
7
96  
Court’s attention in Exhibit 1 part C of his report .  
[
758] In testimonies on discovery rendered in 1995 and 1996, Wightman said:  
On October 11, 1995  
First of all Castor wasn’t a bank so the comparison is perhaps not valid797  
.
On August 13, 1996  
In answer to the following question “Did you indicate to your valuations  
Department that the business of Castor was comparable to the business of major  
Canadian public trust companies?”  
No, As a matter of fact I recall discussing whether in fact that was a good basis to  
compare with or not to compare with because I said it wasn’t comparable to a  
798  
trust company…  
And further, on page 70  
I had to agree that I couldn’t name any company that I felt – any companies or  
company that was more closely related to Castor’s activities7  
99  
794  
795  
796  
797  
798  
PW-1419-13  
Vance, May 28, 2008, p.248  
D-1295-1  
Wightman, October 11, 1995, p. 131  
Wightman, August 13, 1996, p. 68  
500-05-001686-946  
PAGE: 168  
On September 13, 1996  
In answer to a question relating to the format of SCNIA that was used between  
986 and 1990 for Castor  
1
We had great difficulty in finding companies that we felt were comparable to  
CASTOR and so that in itself would not lead me to compare them to all other  
800  
financial institutions  
.
In answer to a question relating to the use of the SCFP  
First of all I don’t know of any industry that CASTOR was in specifically that is  
public information. As I told you, the trust companies were regulated companies,  
they were – insurance companies were regulated companies, banks were  
regulated companies and they all had particular reporting requirements.  
CASTOR was not a regulated company as such and that’s where we always had  
difficulty finding what you would call companies in the same industry. And so I  
don’t think to compare CASTOR,s – because it was making mortgage loans to  
compare it to the trust companies in Canada is a fair comparison for purposes of  
Financial Statement presentation8  
01  
.
[
759] Marcinski, another partner of C&L, when questioned on discovery about Castor  
and its business, testified as follows:  
I’m unaware of any other clients in our practice that would have had a socalled  
mortgage reserve for example, which was an unusual income tax complication  
802  
…)  
(
As well, I’m unaware of any other client in the Montreal practice that would have  
been characterized as a so-called trust and loan corporation for purposes of the  
Quebec Taxation Act, (…)8  
03  
At the time, in 1989, I’d had ten (10) years of work experience, to be fair, in my  
experience this was a new client, a unique client as I mentioned, (…)8  
04  
799  
800  
801  
802  
803  
804  
Wightman, August 13, 1996, p.70  
Wightman, September 13, 1996, p. 40  
Wightman, September 13, 1996, pp. 52-53  
Marcinski, January 10, 1996, p. 40  
Marcinski, January 10, 1996, p. 41  
Marcinski, January 10, 1996, p. 220  
500-05-001686-946  
PAGE: 169  
[
760] In a letter dated April 3, 1989, in reply to an exposure draft, the Superintendent of  
financial institutions Canada wrote to the CICA:  
My fundamental problem at the moment is that, until a great deal of work is done,  
my office will not accept the inclusion of banks within the scope of the handbook.  
In taking this position I have the general support of the banking industry and  
those chartered accountants most familiar with banking auditing and  
805  
accounting  
.
[
761] In C&L’s technical policy statement TPS-A-400, revised December 29, 1989, one  
reads at paragraph 4:  
Except where otherwise stated in a particular Recommendation, the Accounting  
Recommendations of the Handbook are applicable to all types of profit-oriented  
enterprises other than banks and to most non-profit organizations.8  
06  
[
762] On cross-examination on June 1, 2009, Selman explained that the Bank Act did  
not require a SCFP and he acknowledged the following:  
The superintendant had never mandated that the banks prepare a statement of  
changes in financial position. Some banks chose to do so and some banks chose  
807  
not to do so  
.
(
…) the statement of changes in financial position had not been mandated as a  
requirement by the superintendant and (…)  
So in one sense, I would accept that you could say that the banks were exempt  
808  
from the handbook (…)  
Experts’ evidence  
[
763] Both experts, Vance and Selman, agreed that «the standards cannot set a rule of  
general application applicable to all circumstances so you have to be able to understand  
8
09  
the spirit of the rule and how to use it» .  
[
764] There is no dispute that the standard audit opinion uses the phrase “present  
fairly in accordance to GAAP”.  
[
765] There is no dispute between the experts that, where a loan agreement provides  
for planned capitalization of interest and/or fees, the accrued interest and fees are  
8
10  
recognized as revenue provided that there is reasonable assurance of collectability .  
805  
806  
807  
808  
809  
810  
D-742  
PW-1420-1B, TPS-A-400  
Selman, June 1, 2009, p. 117  
Selman, June 1, 2009, p.118  
D-1295, p. 242.  
PW-2941, Vol. 2, p. 125, para. 2.247.  
500-05-001686-946  
PAGE: 170  
Pla in t iff’s exp er t s  
[
766] Vance opined that Castor was required to disclose the amount of its capitalized  
interest revenue. In support of this position, Vance invited the Court to take account of  
any combination of the following requirements, the strongest being the requirement for a  
8
11  
SCFP (given the factual situation) :  
•
Section 1500.05 and the duty to present fairly, such duty being part of GAAP812  
in that “when you finish the audit, and you've done all the bits and pieces, you  
have to stand back and make sure that what you've done results in fair  
8
13  
presentation” ;  
Section 1540 relating to the SCFP ; and  
Section 3850 relating to the disclosure of capitalized interests .  
8
14  
•
•
8
15  
[
767] Vance opined that section 1500.05 of the Handbook was setting “an omnibus  
816  
standard of fairness that had to prevail through the financial statements” .  
8
17  
[
768] As authoritative support for his interpretation of section 1500.05, Vance  
referred to the MacDonald Commission Report, to its recommendation that there be a  
818  
stand back look” of financial statements . He explained that the recommendation did  
“
not lead to a change in the Handbook because the CICA Committee, of which he was  
8
19  
an active member, felt that such a requirement was already part of GAAP . However,  
Vance acknowledged having been made aware later that some practitioners held  
8
20  
different views .  
[
769] Rosen also opined that Castor was required to disclose the amount of its  
capitalized interest revenue.  
[
770] As he explained, to differentiate fantasy from reality, planned and unplanned  
capitalization has to be looked at in a precise factual context, from a practical point of  
8
21  
view rather than a theoretical one .  
[
771] Rosen relied on section 1000 of the Handbook to support his testimony that there  
was a separate fairness standard.  
811  
812  
813  
814  
815  
816  
817  
818  
819  
820  
821  
Vance, May 28, 2008, pp.196-197  
PW-1419-2, s.1500.05; Vance, April 12, 2010, p. 96.  
Vance, May 28, 2008, p.194  
See the section of the present judgment relating to the SCFP  
Vance, March 6, 2008 p.152-154  
Vance, May 28, 2008, p.195  
PW-2908,p. 4-D-6 to 4-D-7 and Vance, March 6, 2008 p.179-180  
PW-1432A R-20 on p. 60  
Vance, May 28, 2008, pp.210-211  
Vance, Mai 28, 2008, pp.199-200  
Rosen, March 30, 2009, pp. 37-56  
500-05-001686-946  
PAGE: 171  
[
772] Rosen stated that, in 1988, 1989 and 1990, the bulk of the people interpreting  
section 3850 were saying that section 3850 was applicable to disclosure of capitalized  
interest revenue, but he acknowledged that it was possible to find people who did not  
8
22  
interpret it that way .  
[773] Froese was not asked to opine on this topic but in his report, he wrote:  
1
1.11 We were not asked to provide our opinion as to whether Castor complied  
with GAAP in relation to its failure to prepare a statement of changes in financial  
position or otherwise disclose the extent of capitalized interest in the notes to its  
consolidated financial statements.  
1
1.12 However, due to the extent of interest capitalization and C&L’s awareness,  
at least in part, of the extent of interest capitalization, in our opinion Castor and  
C&L should have considered whether interest capitalization was occurring to  
such an extent that it required disclosure8  
23  
.
[
774] In cross-examination on December 12, 2008, Froese testified as follows:  
A- GAAP had no specific provisions that required you to disclose the extent of  
non-accrual loans. But GAAP does require you to disclose information that's  
material to the financial statement readers in relation to financial... the financial  
statements. And when you look at the extent of non-accrual loans over those  
three (3) years, in my opinion, the extent of non-accrual loans is material.  
Q- And would you agree that a reasonably competent professional during the  
relevant years could differ with you on that disclosure issue, given their  
interpretation of the requirements of GAAP and the debate that was ongoing in  
respect to fairness?  
A- That's possible. It depends on whether they have the same fundamental  
assumptions or facts that you're basing it on. So if you look at the full extent  
of non-accrual loans as set out in Volume 1 that, in my view, are nonperforming  
and should be on a non-accrual basis, and you compare that to the total financial  
statements. If they have the same information, in my view, most - and I can't  
say all - but I would think most professionals would agree it requires  
disclosure.  
If it was a much smaller amount or had a different framework underlying, it is a  
non-accrual loans where five percent (5%) or two percent (2%) of total loans, I  
would agree disclosure is likely not required8 . (our emphasis)  
24  
Defen d a n t s ’ exp er t  
822  
823  
824  
Rosen, March 26, 2009, p. 182  
PW-2941, volume 1, p. 191  
Froese, December 12, 2008, p.19  
500-05-001686-946  
PAGE: 172  
[
775] Selman opined that the issue of materiality of capitalized interest was irrelevant  
unless the Handbook specifically required disclosure of an item and therefore, even if  
00% of the interest income was made up of capitalized interest, there was no  
1
8
25  
disclosure requirement .  
[
776] Selman referred to section 1000.03, which states clearly that section 1000 does  
not set disclosure standards and concluded that, as a result, any auditor who attempted  
to impose additional disclosure on his client by appealing to section 1000 would be met  
8
26  
with resistance that, in his view, would be legitimate .  
[777] Selman opined that section 1500.05 was intended to ensure that all information  
to see, as part of fair presentation, would be included within the financial statements,  
including notes and other schedules to which the financial statements were cross-  
referenced. Selman explained that the issue was purely a matter of location of the  
information - the goal was to make it clear that an assessment of whether the financial  
statements presented the financial position fairly in accordance with GAAP should not  
include consideration of whether the reporting entity had provided information required  
under GAAP in some other document, such as a management discussion and analysis.  
In other words, the financial statements had to provide all the information required by  
GAAP within themselves. 8  
27  
[
778] Selman opined that section 3850 of the Handbook had to be interpreted and  
828  
applied as referring to capitalized interest expense only based on the contents of the  
8
29  
Exposure Draft that preceded its adoption and the discussion in the Public Record .  
779] Selman pointed out8 that the statement included in the CA Magazine, by its  
30  
[
nature, referred only to capitalized interest expense.  
[
780] Selman concluded that reading all of these materials made it clear that section  
3
850 was not dealing with the accounting disclosures of the lender and did not require  
disclosure of capitalized interest revenue.  
[
781] Selman referred to the research he had done and highlighted that he had listed  
seventy-four financial companies that did not disclose the amount of their capitalized  
interest revenue – that six of these indicated that they had a capitalization policy and  
that one said it had no capitalized interest. Selman added that some of these lenders  
8
31  
were known to lend to developers and some of them were lending to Castor .  
825  
826  
827  
828  
829  
830  
831  
Selman, June 11, 2009, pp. 58–59.  
Selman, May 7, 2009, p.161  
Selman, May 7, 2009 p.86-94  
Selman, May 8, 2009, p.119-120  
D-487-2 and PW-1423  
Selman, May 8, 2009, pp.119-120  
Selman, May 8, 2009, pp.135 -148  
500-05-001686-946  
PAGE: 173  
[
782] Selman could not opine as to the ultimate collectability of the capitalized interest  
but he did opine that preparers had a choice to reverse capitalized or accrued interest  
that was determined not to be ultimately collectible, or to set up a compensating loan  
8
32  
loss provision (“LLP”). .  
Conclusions  
833  
783] Revenue is recognized when “ultimate collection is reasonably assured” .  
[
Revenue should not be recognized unless there is reasonable assurance of  
collectability and measurement.  
[
[
784] Capitalization of interest was not in itself unusual.  
785] Financial statements are by their very nature summaries of financial events,  
including transactions and commitments and it is not possible to convey all financial  
information that might be of interest to all readers. However, material information must  
be disclosed.  
[
786] Provided a client’s financial statements were not misleading nor materially  
misstated and met GAAP, an auditor was powerless to insist on fuller disclosure even  
where he knew that the financial statements would not meet the information needs of  
certain types of users. Such auditor had however to apply an overall fairness standard  
within GAAP. The Handbook’s primary directive is to reasonably ensure that financial  
statements are presented fairly and are not materially misstated.  
[787] As Anderson wrote:  
•
“The concept of fairness should not be interpreted as imposing a subjective set of  
standards that would prevail over GAAP”; but,  
•
“there is thus considerable scope within GAAP to apply an overall fairness  
standard in the preparation of financial statements. This may logically be  
interpreted as calling for compliance with the spirit rather than with the letter of  
the accounting recommendations”.  
8
34  
[
788] The amount of capitalized interest was indisputably material and C&L knew that  
interest was not being collected in cash, but was being routinely capitalized.  
789] The concern that the Castor audits were characterized by overreliance on  
[
valuations of collateral without considering the financial condition of the borrower,  
832  
833  
834  
Selman, May 8, 2009 p.103-109  
PW-1419-1, section 3400.06; Rosen, February 3, 2009 p.50-54; Selman, May 8, 2009 p.103  
PW-1421-9 and PW-1421-22  
500-05-001686-946  
PAGE: 174  
deemed “collateral myopia”, being the «failure to see beyond collateral values to a  
8
35  
financial weakness...» , appears to have driven Higgins and Carvell, the peer  
reviewers, to recommend on November 10, 1988 the use of bank questionnaires for the  
Castor audits in the future. Those questionnaires put a much greater focus on the  
assessment of both the value of the collateral and the financial condition of the  
8
36  
borrower .  
[
790] Wightman testified that he could not tell if 10% or 90 % of revenue was  
capitalized interest. Only two possible conclusions can be drawn from such testimony:  
•
•
Wightman was being untruthful; or  
Wightman was acknowledging his ignorance of a very critical feature of Castor’s  
business as a lender.  
[
791] Whatever conclusion the Court may come to, a fact remains: at the end of the  
day, Defendants ignored this very critical feature of Castor’s situation in the exercise of  
professional judgment.  
[
792] According to the Handbook the objective of financial statements is to  
communicate material information to users and its overarching purpose is to ensure  
disclosure if necessary to avoid a material misstatement. Although the auditor does not  
give an opinion on “fairness” as such, fairness still remains part of the equation. In his  
report, the auditor does not say that the financial statements present the situation in  
accordance to GAAP but he says that the financial statements present fairly in  
accordance to GAAP.  
[
793] This issue of undisclosed capitalized interest was considered by the British  
Columbia Court of Appeal in a case known as the Kripps case.  
[
794] The factual context of the Kripps case is similar to the present case: it involves a  
lender who, in the early 80s, disclosed its policy of permitting capitalized interest, but  
not the quantum of capitalized interest on its audited financial statements (although the  
amount was available in a public document) and who was seeking, in 1983-1984,  
investments in debentures through a prospectus into which its audited financial  
statements and its auditor’s report were included.  
[
795] Defendants have urged this Court to disregard the Kripps decision alleging that it  
had been rendered in a context of a two-part opinion. This argument has no merit:  
except for the fact that in Kripps, there is a SCFP, while in Castor, there is a SCNIA, the  
auditor’s report in litigation in the Kripps case and the C&L’s audit report of 1988 in  
litigation are “twins”.  
8
35  
36  
PW-2942  
8
PW-2590, para. 5h.  
500-05-001686-946  
PAGE: 175  
Audit report in the Kripps case837  
C&L report (1988 audited  
financial statements)8  
38  
We have examined the balance sheet of  
Victoria Mortgage Corporation Ltd. as at  
December 31, 1983 and 1982 and the  
statements of operations and retained  
earnings and changes in financial  
position for the year then ended; and the  
consolidated statements of operations,  
retained earnings and changes in  
financial position of the year ended  
December 31, 1981, the four months  
ended December 31, 1980 and the year  
We have examined the  
consolidated balance sheet of  
Castor Holdings ltd. as at  
December 31, 1988 and the  
consolidated statements of  
earnings, retained earnings  
and changes in net invested  
assets for the year then  
ended. Our examination was  
made in accordance with  
generally accepted auditing  
standards, and accordingly  
included such tests and other  
procedures as we considered  
ended 1980. Our  
examination was made in accordance  
auditing  
August  
31,  
with  
generally  
accepted  
standards, and accordingly included  
such tests and other procedures as we  
necessary  
in  
the  
circumstances.  
considered  
necessary  
in  
the  
circumstances.  
In  
our  
opinion,  
these  
financial  
In  
our  
opinion,  
these  
statements present fairly the financial  
position of the Company as at  
December 31, 1983 and 1982, and the  
results of its operations and the changes  
of financial position of the years ended  
December 31, 1983, 1982, and 1981,  
the four months period ended December  
consolidated  
financial  
statements present fairly the  
financial position of the  
company as at December 31,  
1988 and the results of its  
operations and the changes in  
its net invested assets for the  
3
1
1, 1980 and the year ended August 31,  
980 in accordance with generally  
year in  
then  
ended  
accordance with generally  
accepted accounting principles applied  
on a consistent basis.  
accepted  
accounting  
principles applied on a basis  
consistent with that of the  
preceding year.  
8
37  
Kripps v. Touche Ross & Co., [1997] CanLII 2007 (BC C.A.), paragraph 113 (in the dissenting opinion)  
1997] 6 W.W.R. 421 • (1997), 33 B.C.L.R. (3d) 254  
PW-5, tab 10 (see also tab 11 and tab 12 for 1989 and 1990)  
[
838  
500-05-001686-946  
PAGE: 176  
[
796] The British Columbia Court of Appeal did not accept Selman’s opinion that  
disclosure of material capitalized interest was not required under GAAP. Leave to  
8
39  
appeal was refused by the Supreme Court of Canada .  
[
797] The British Columbia Court of Appeal held that in 1984, the CICA was moving  
towards a requirement that the failure to disclose explicitly the amount of unpaid interest  
(
if material) was contrary to the goal of presenting fairly the financial position of the  
company and, in 1985, the CICA formally changed GAAP in this regard. There is no  
doubt that the Court is referencing here the modifications to the SCFP that were  
introduced in 1985 by the CICA and the understanding that the modifications would  
facilitate the disclosure of unpaid interest (i.e., non-cash) to the reader.  
5
6. Although capitalizing unpaid interest was part of GAAP at the time Touche  
prepared its auditor’s report, the accounting profession had begun to recognize  
the failings inherent in this approach. The Canadian Institute of Chartered  
Accountants (CICA) appears in retrospect to have been moving towards a  
recognition that failing to disclose explicitly the amount of unpaid interest made it  
difficult for financial statements to fulfill the broad aim of presenting fairly the  
financial position of the company, and that GAAP had to be changed so as to  
fulfill the broader aim. The financial statements prepared for VMCL the next year  
(
1985) did disclose accrued and unpaid interest, although the CICA did not  
840  
.
formally change GAAP until later in 1985  
[798] The British Columbia Court of Appeal wrote:  
6
5 (…) It is clear from the Handbook that the paramount aim in auditing and in  
providing an unqualified audit is to ensure that the financial statements “present  
fairly” the financial position of the company being audited. GAAP is a tool to  
achieve that fair presentation. (…) The tool used – GAAP – is intended to result  
in such fair presentation and when it does not the tool is revised, as it was in  
1
985 when it became clear that the practice of capitalizing unpaid interest  
could be misleading.  
6
6. Given the aim in auditing, the understanding of audits that those who might  
rely on them have, and that auditors know of this understanding, auditors  
cannot hide behind the qualification to their reports (“according to GAAP”)  
where the financial statements nevertheless misrepresent the financial position of  
the company. (our emphasis)  
8
39  
40  
SCC News release of November 6, 1997 , file 26118  
8
Kripps v. Touche Ross & Co., [1997] CanLII 2007 (BC C.A.), paragraph 56; [1997] 6 W.W.R. 421 •  
[1997], 33 B.C.L.R. (3d) 254  
500-05-001686-946  
PAGE: 177  
[
799] As to the judicial attitude towards standards, the British Columbia Court of  
Appeal cited Sopinka J., writing for the majority of the Supreme Court in Ter Neuzen v.  
Korn:  
I conclude from the foregoing, as a general rule, where a procedure involves  
difficult or uncertain questions of medical treatment or complex, scientific or  
highly technical matters that are beyond the ordinary experience and  
understanding of a judge or jury, it will not be open to find a standard medical  
practice negligent. On the other hand, as an exception to the general rule, if a  
standard practice fails to adopt obvious and reasonable precautions which are  
readily apparent to the ordinary finder of fact, then it is no excuse for a  
practitioner to claim that he or she was merely conforming to such a negligent  
841  
common practice.  
[
800] Thereafter, the British Columbia Court of Appeal concluded that it “respectfully  
disagree with the learned trial judge that it is appropriate for auditors to sign unqualified  
auditor’s reports if the financial statements are prepared in accordance with GAAP, if  
the auditors know or ought to know that the financial statements are misleading”.  
[
801] The standard opinion in 1988 clearly called for a single opinion that tied  
“
fairness” to GAAP, GAAP calling for any information required for fair presentation of  
financial position, results of operations, or changes in financial position, to be presented  
in the financial statements including notes to such statements and supporting schedules  
to which the financial statements are cross-referenced.  
[
802] Taking into account the evidence summarized in the section “What others did” of  
the present judgment, the way banks and other regulated entities presented their  
financial statements during the relevant years is not conclusive.  
[
803] In the normal course of business, financial institutions do not recognize a  
disproportionate percentage of their revenue in the form of capitalized interests. Not  
only does a 90 day rule for recognition of revenue prevent such inappropriate  
recognition, it is simply not normal in Canada for a bank or other financial institutions not  
to receive interests on a monthly basis from its borrowers when contractual provisions  
so provide. Banks do not tolerate, as Castor did, that close to 90% of their recorded  
revenue from loans results from capitalization of interest and fees.  
[
804] In Castor’s unique situation, not applying GAAP in a vacuum, disclosure of the  
capitalization of interest and of the quantum of such capitalized interests had to be  
done.  
[
805] In 1988, given all the discussed sections of the Handbook in force, taking  
account of the knowledge of C&L as to the uses that they themselves, and other users  
8
41  
Ter Neuzen v. Korn [1995] CanLII 72 (S.C.C.) cited in Kripps v. Touche Ross & Co., [1997] CanLII  
007 (BC C.A.), paragraph 69; [1997] 6 W.W.R. 421 • [1997], 33 B.C.L.R. (3d) 254  
2
500-05-001686-946  
PAGE: 178  
would have for their audit work and audit report, the capitalization of interest and the  
quantum of such capitalized interests was mandatory to prevent materially misstated  
and misleading audited financial statements from circulating. Reasonableness leads to  
conclude accordingly.  
Understatement of Loan loss provisions and overstatement of carrying  
value of Castor’s loan portfolio and equity  
[
806] Section 3020 of the Handbook concerns the carrying value of loans and requires  
the preparer to value these assets at the lower of estimated realizable value and cost.  
As a result, the amount of the loan balances on Castor’s books (inclusive of capitalized  
interest) has to be used as a starting point – it represents the cost of the assets.  
[
807] In 1988, Castor represented a carrying value of loans (investments in mortgages,  
842  
:
secured debentures and advances) of $1 005,992 in its audited financial statements  
it represented that the figure of $1 005,992 was the lower of estimated realizable value  
and cost.  
[
808] The next three subheadings that deal with the question and answer at the heart  
of the matter, with the positions of the parties, in a nutshell, and with the experts’  
assessment of the loan loss provisions, as exposed in three different grids, serve as an  
introduction to detailed analysis of various loans and projects that were financed by  
Castor, which starts thereafter.  
Question and answer at the heart of the matter  
Question  
[
809] To try to assess the exact quantum of any LLP that might have been required for  
988 is neither achievable nor necessary. This litigation is not about what should have  
1
been the precise content of Castor’s financial statements for 1988. It is about whether or  
not C&L’s 1988 audited financial statements of Castor presented fairly the financial  
position of Castor in accordance with GAAP, as they purported to do.  
[
810] At December 31, 1988, could the carrying value of loans, at the lower of  
estimated realizable value and cost, be $1 005,992 or an amount close enough to $1  
0
05,992 to avoid a material misstatement?  
842  
PW-5, tab 10  
500-05-001686-946  
PAGE: 179  
Answer  
[
811] Taking into account the facts as they unfolded, viewed and analysed in the  
context of the relationship that existed between Castor and YH, the obvious conclusion  
is that the carrying value of loans could not be $1 005,992 or an amount close enough  
to $1 005,992 to avoid a material misstatement.  
[
812] In the absence of a significant LLP, the 1988 Castor audited financial statements  
were materially misstated.  
Positions in a nutshell  
Plaintiff  
[
813] Plaintiff argues that, for 1988, the loans were largely overstated by at least  
123.6 million.  
$
•
Plaintiff’s experts each only reviewed about half of the loan portfolio for purposes  
of establishing required loan loss provisions. For the most part and to give C&L  
the “benefit of the doubt”, Plaintiff’s experts used appraisal values even though it  
was apparent that such values were overstated and relied on assumptions that  
were not and could not be attained.  
•
Had all of the loans in the portfolio been examined and valued in accordance with  
GAAP, the loan losses would have been far greater.  
[
814] Because the determined losses were so huge, Plaintiff pleads that it was not  
necessary for experts to ascertain all of the overstatements; in either event, the audited  
financial statements were manifestly misstated and misleading.  
[
815] Hopes and dreams cannot be employed to artificially create value under GAAP  
because there is no reasonable certainty that such future events will ever occur.  
[816] Plaintiff maintains:  
•
That Goodman’s values and assumptions (factual premises) are often  
unsustainable or inaccurate;  
•
That Goodman relies on security enforcement scenarios which are totally  
unrealistic, never considered by Castor and never relied upon by C&L for  
purposes of valuing the loans; and  
•
That Goodman applies a theory of offset that has no basis either in law or in  
accounting to overcome deficiencies.  
500-05-001686-946  
PAGE: 180  
843  
817] «GAAP cannot be used to fool people and distort financial statements» , says  
[
Plaintiff.  
Defendants  
[
818] Defendants say GAAP requires that very specific evidentiary requirements be  
fulfilled in order to allow a departure from the known precision of contractually owed  
amounts to the subjective realm of “best estimates”.  
[
819] As the preparer moves from the certainty of cost, he must ensure his estimate is  
reliable; he is required to follow specific GAAP evidentiary rules to support that  
adjustment.  
[
820] Defendants argue that a loan loss had to be both probable and estimable to be  
recorded under GAAP; absent one of these two elements, the only acceptable GAAP  
amount was “cost”. GAAP did not permit speculation: GAAP required a loss to be  
probable rather than merely possible, before a provision was taken.  
[
821] Defendants insist that in determining whether a loss was probable, GAAP  
required that the lender’s options be considered, but they recognize it has to be done  
within realistic assumptions, which are consistent with the lender’s intentions and his  
financial and contractual ability.  
[
822] Defendants say that any analysis that fails to take into consideration Castor’s  
business model, such as the Plaintiff expert’s analysis, does not meet GAAP.  
Experts’ figures  
[
823] All Plaintiff’s experts opine that LLP should have been taken in 1988, the lowest  
minimum LLP assessment being in the amount of $123.6 million as per calculations of  
Froese.  
[824] Vance proposes a total minimum LLP of $184 million breaking down as follows:  
Project/Category  
Vance’s proposed minimum LLP  
54 million  
MLV  
YH Corporate loans  
MEC  
77.665 million  
11 million  
TSH  
20.4 million  
843  
Vance, April 12, 2010, p.181  
500-05-001686-946  
PAGE: 181  
CHS  
OSH  
9.4 million  
10.9 million  
[
825] Rosen proposes that LLP ranged between $182 to $271 million breaking down  
844  
as follows :  
Project/Category  
Approach A - Approach A-  
Approach B- Approach B-  
Low  
High  
Low  
High  
MLV  
YH Corporate loans  
MEC  
46.3 million  
79 million  
3 million  
52.9 million  
91 million  
13 million  
20 million  
14.4 million  
40 million  
7.6 million  
46.3 million  
87 million  
3 million  
52.9 million  
99 million  
13 million  
35 million  
23.4 million  
40 million  
7.6 million  
TSH  
18 million  
3.8 million  
25 million  
7 million  
33 million  
12.8 million  
25 million  
7 million  
CSH  
TWTC  
Meadowlark  
[
826] Froese proposes that LLP ranged between $123.6 to $152.9 million breaking  
845  
down as follows :  
Project/Category  
Low  
High  
MLV  
43 million  
52,3 million  
3,9 million  
43 million  
68,4 million  
17,1 million  
YH Corporate loans  
CHS  
8
44  
45  
PW-3033, volume 2  
8
PW-2941-4; PW-2941, volume 1, p. 33  
5
00-05-001686-946  
PAGE: 182  
24,4 million  
THS  
24,4 million  
[
827] Goodman opines that no LLPs were needed.  
828] Goodman outlined a five step methodology and alleged that all his calculations  
[
had been made accordingly. Those five steps are:  
•
Step #1: Make a best estimate of the market value of the collateral security,  
deducting net liabilities that would be payable, which is “Castor’s Value of  
Collateral Security”;  
•
•
•
•
Step #2: Identify prior-ranking debt, property taxes payable and construction  
payables, to arrive at the “Value Available to Castor”;  
Step #3: Compute the outstanding loans owing to Castor as at December 31 of  
each year (their cost);  
Step #4: Deduct the amounts in steps 2 and 3 from the amount in step 1, to  
determine whether there is a collateral surplus or deficiency, and its amount;  
Step #5: Determine whether a deficiency identified in step 4 indicates that it was  
probable that Castor would suffer a loss, or whether, after considering the  
options, intent and business arrangements, a loss was not estimable and  
probable.  
[
829] The more serious dispute between Plaintiff’s’ experts and Goodman is with  
respect to the value used for step 1 and the proper application of step 5 under GAAP  
given Castor’s reality and Castor’s borrowers’ realities.  
Discussion  
[
830] The loans looked at by experts are largely the same, but Plaintiff’s experts and  
Goodman used different groupings depending on the conclusions they reached as to  
the ownership of some properties or entities.  
[
831] The discussion of the LLP issue is done, in light of the burden of proof that rests  
on Plaintiff, by using Plaintiff experts’ groupings and the following sub-headings: MLV,  
YH Corporate loans, MEC, TSH, CSH, OSH, TWTC and Meadowlark.  
500-05-001686-946  
PAGE: 183  
MLV  
Experts’ positions  
[
832] Plaintiff’s experts opined that LLPs were required for MLV, the proposed  
minimum LLPs being:  
•
•
•
54 million, according to Vance.  
43 million, according to Froese.  
46.3 million, according to Rosen.  
[833] Goodman opined that no LLPs were needed for MLV.  
Additional evidence specific to MLV  
Pr ior t o 1 9 8 8  
[
834] In 1983, R.B. Mullins (“Mullins”) of Mullins Realty Limited had been retained by  
846  
Castor to appraise MLV as of March 1, 1983 . Using the Income Approach, Mullins  
had estimated the value of the property at 129 million (mid-point) and concluded that  
MLV had an estimated market value of 130 million, including all furniture, fixtures and  
8
47  
equipment .  
[
835] In fact, between 1984 and 1987, MLV’s income before interest, depreciation and  
848  
income taxes was significantly less than that projected in the 1983 Mullins Report .  
[
836] In 1986, repeated statements of claim were filed by Great-West Life Assurance  
Company against MLVII for payment in relation to MLVII’s default on payments under  
8
49  
the terms of an $11 million mortgage loan .  
[
837] Amounts due and payable to debenture holders on April 1, 1987 and October 1,  
850  
987, totalling more than $6 million, were not paid .  
1
[
838] In 1987, MLVII received demands for payment of overdue property taxes from  
the City of Niagara Falls.  
[839] Interest continued to be capitalized on the CHIF loans to MLV Investors.  
846  
847  
848  
849  
850  
PW-493  
PW-493, page 94  
Froese, PW-2941, volume 3, p.25  
PW-483 A to PW-483D  
PW-1070H-2  
500-05-001686-946  
PAGE: 184  
[
840] Statements made to Wightman during the year-end wrap-up meeting in the 1986  
851  
audit regarding reduction of the MLV loans had failed to materialize, but the topic was  
not brought up at the year-end wrap-up meeting of the 1987 audit.  
[
841] Audited financial statements for MLV for the year ended September 30, 1987  
were not available until early 1989. These audited financial statements for the year  
ended September 30, 1987 included a going concern note that highlighted an  
outstanding renegotiation of indebtedness, outstanding property taxes, and the need for  
8
52  
continued financial support from related parties .  
Note 3 a  
(
…) At September 30, 1987 accounts payable and accrued liabilities include  
property taxes of $3,172,709 (1986, $2,759,697) which were in arrears. The City  
of Niagara Falls filed a tax arrears certificate against the Company in the amount  
of $2,800,000.  
Note 3b  
The first mortgage due on demand was to have been renegotiated in January  
1
988. This renegotiation has not yet been achieved and as a result the full  
amount is now due.  
Term bank loan principal of $2,225,000 remained unpaid.  
The property tax arrears were paid in full on January 3, 1989 using the proceeds  
of a loan of $5 million. The loan matures March 31, 1989.  
Note 11  
The Company has received substantial financial support from related parties as  
more fully described in notes 4 and 9. As set out in notes 3 and 5, at January 3,  
1
989 the first mortgage bank loan has not been renegotiated and certain required  
payments on a term bank loan and the subordinated debentures had not been  
made.  
The Company is negotiating financing of $50 million to refinance existing  
mortgages and loans as well as providing approximately $15 million for  
refurbishment and new construction. At January 3, 1989 this financing, which will  
require the agreement of the holders of the subordinated debentures, had not  
been finalized.  
The successful negotiation of such financing and/or the continuance of the  
financial support noted above, which the related parties have agreed to continue,  
are required in order to ensure continued operations.”  
8
51  
52  
PW-1053-3, p.474  
PW-478D.  
8
500-05-001686-946  
PAGE: 185  
1
9 8 8 Even t s  
[
842] The operations of MLV continued to encounter serious financial difficulties in  
1
988.  
[
843] In April 1988, Castor advanced its first direct loan to MLVII, beginning with a  
2.75 million unsecured credit facility (loan 1105). A promissory note was provided by  
$
MLVII and guaranteed by YHDL. Castor’s representatives were to sign all cheques on  
the bank account to which the loan proceeds were being advanced, along with YHHL  
personnel. The loan terms also gave Castor the ability to take control of MLVII’s bank  
accounts at its discretion, as follows:  
“
Castor Holdings Ltd. will receive and hold, undated, executed, revised banking  
resolutions for all bank accounts of Maple Leaf Village. In the interim, Castor  
reserves the right to control all cash flow of Maple Leaf Village until full  
repayment of the Grid Promissory Note.”8  
53  
[
844] This credit note facility (loan 1105) was to be used to fund MLVII’s short term  
cash flow requirements and was to be repaid from cash flow over the summer of 1988  
and “the balance, if any, will be due and payable on September 15, 1988.” Instead of  
being repaid by September 15, 1988, the loan balance increased to $3.1 million by  
8
54  
December 31, 1988 .  
[
845] From June to October 1988, negotiations took place to sell the hotel properties  
855  
owned or managed by YHHL.  
[
846] On August 18, 1988, further to the various discussions that had taken place, a  
conditional offer of $190 million was presented to YHHL. Said offer included the TSH,  
8
56  
the CSH, the OSH, the Skyline Triumph Hotel, and the MLV Hotels .  
8
57  
[
847] YHHL made a counter-offer , excluding the Skyline Triumph Hotel, and  
proposed to increase the price to $215 million, net of commissions, based on the  
8
58  
following values :  
Property  
TSH  
Amount  
$
93 million  
CSH  
$50 million  
8
8
8
53  
54  
55  
PW-486 and PW-486A.  
PW-1053-23-10, sequential page 80  
Prychidny, November 4, 2008, pp. 229 and following; D-1034, D-1035, PW-499, PW-499A, PW-499B,  
PW-499D, PW-499E, PW-499F and PW-2928  
PW-499  
856  
857  
858  
PW-499B; D-1035.  
PW-499B and PW-499F  
500-05-001686-946  
PAGE: 186  
MLV  
(
Foxhead, Brock, Village Inn)  
$70 million  
10 million  
OSH  
$
[
848] In the Niagara Falls Review newspaper dated July 30, 1988, an article entitled  
Only five months remain before city takes hotels” stated that MLVII had been given one  
year from January 1988 to pay the overdue taxes or the City would take over and sell  
“
8
59  
the properties to make up for unpaid taxes.  
[
849] On September 2, 1988, First Interstate Bank (“FICAN”) demanded payment  
860  
further to MLVII’s default under its loan agreement . Defaults disclosed in the letter  
included the failure to pay principal and interest punctually, the failure to pay Worker’s  
Compensation Board assessments and the failure to advise FICAN of defaults under  
loan covenants. FICAN namely wrote to MLVII:  
Over the course of the past year, you have made several representations and  
promises to us with respect to repayment of our loan facilities through alternate  
financing. The bank is not satisfied that reasonable progress has been made by  
you to fulfil your representations and meet your continuing obligations to the  
861  
bank  
.
(
…)  
As you know, the bank is required to advise Castor Holdings (Quebec) Ltd. of  
any default under the priorities agreement dated April 17, 1984, as amended, to  
which you are a party. Accordingly, we have given Castor Holdings formal written  
notice that there are defaults under the provisions of the original loan agreement,  
862  
as amended  
.
[
850] In September 1988, Great-West Life introduced a court claim against MLVII  
863  
before the Supreme Court of Ontario for reimbursement of its mortgage .  
[
851] On October 20, 1988, National Bank sent a demand letter stating its loan had  
been in default since January 1988 and requesting MLVII to make payments to bring  
8
64  
the interest current . National Bank namely wrote:  
As you are aware, despite our repeated requests for payment, interest of  
$
157,087.10 for August 1988 and $165,927.97 for September 1988 are currently  
overdue and on October 25, 1988, interest for October 1988 will be due.  
859  
860  
861  
862  
863  
864  
PW-1070G-3.  
PW-481 and PW-1077.  
PW-481, p.1  
PW-481, p.3  
PW-1070F, tab 4 (also - PW-483E-1)  
PW-482.  
500-05-001686-946  
PAGE: 187  
The Bank is not prepared to tolerate this situation any longer.  
[
852] From September to December 1988, National Bank and FICAN exerted  
substantial pressure on MLVII to bring current MLVII’s outstanding debt. During the  
same period, YHHL attempted to obtain further payment postponements, the reason  
8
65  
being to complete a proposed refinancing with Mellon Bank Canada (“Mellon”) .  
[853] On December 5, 1988, Mellon proposed to MLVII its terms for a syndicated  
mortgage loan: Mellon would fund $50 million, with no more than $25 million syndicated  
to other lenders, to refinance existing first and second mortgage loans and finance  
improvements for the hotel complex. Those terms and conditions required that MLVII  
achieve stabilized net funds available for debt servicing of $5.5 million ($4.1 million from  
hotel operations and $1.4 million from non-hotel operations) before $44.8 million of the  
loans would be advanced. The preconditions for the Mellon financing also included  
Mellon’s request that the collateral valuation of the land and improvements, as at  
8
66  
completion of improvements, be in excess of $80 million .  
8
67  
[
854] Castor provided a $5 million standby loan to MLVII to “bridge finance” MLVII’s  
obligation to pay the property taxes pending the closing of the Mellon commitment for a  
8
68  
first mortgage financing . As per Castor’s request, the 5 million was paid to McLean &  
8
69  
Kerr in Trust to pay property arrears to the City of Niagara Falls by certified cheque.  
[
855] On January 4, 1989, the Globe & Mail published an article disclosing that MLVII’s  
overdue property taxes of $4.2 million had been paid one day before the property would  
have been seized by the City of Niagara Falls, an article which was included in Castor’s  
8
70  
loan files for MLVII .  
[
856] MLVII’s revenue for the year ended September 30, 1988 declined from $19.4  
million in 1987 to $18.3 million in 1988 and its income before depreciation declined from  
825,755 to a loss before depreciation of $6.7 million. A footnote to the financial  
statements stated “The above does not include management agreements for 1988 year  
$
8
71  
end” .  
[
857] The December 1988 Month End Report dated December 31, 1988 for MLVII  
872  
included the following in its Executive Commentary:  
865  
866  
867  
868  
869  
870  
871  
872  
PW-481A to PW-481F.  
PW-492.  
PW-485B  
PW-1450-6  
PW-1070G-5; PW-1070G-6  
PW-1070G-8  
PW-478E  
PW-478-F, bates 000140  
500-05-001686-946  
PAGE: 188  
Our cash position is at an intolerable level. We do not have the funds to meet  
current requirements and therefore maintenance and marketing programs will  
suffer.  
[
858] The said report also included occupancy statistics for the year ended December  
873  
1, 1988, summarized as follows :  
3
•
•
Occupancy rate of 40.3% versus a budgeted occupancy rate of 44.3%;  
Average room rate of $79.78 versus a budgeted average room rate of $81.80;  
and  
•
Total room revenue of $9,889,118 versus budgeted room revenue of  
$11,145,592.  
[
859] Interest due to the debenture holders by MLVII was funded by Castor, through  
874  
Account 046 or by bank transfer, and amounted to more than 6 million.  
[
860] The hotels were incapable of meeting their obligations and would have been lost  
875  
without Castor’s support . The MLV project did not generate sufficient operating  
income to meet its first mortgage payments. In 1988, the project generated $4 million of  
net income before debt, but its annual interest obligations alone represented $20.4  
million. Real estate taxes were paid one day before the City of Niagara would have sold  
8
76  
the property for taxes . No money was available from YH to support the MLV  
8
77  
project .  
[861] MLVII no longer produced audited financial statements.  
[
862] As at December 31, 1988, MLVII’s 1988 unaudited financial statements  
8
78  
disclosed the following information :  
879  
Mortgages and loans of $30.7 million ;  
•
•
•
8
80  
bank indebtedness of $7 million ;  
accounts payable and accrued liabilities of $8.8 million;  
873  
874  
875  
876  
877  
878  
879  
880  
PW-478F, bates 000162  
PW-1070H-1  
Prychidny, October 14, 2008, pp. 44-48  
Prychidny, October 15, 2008, pp. 50-52; PW-1053-23, seq. p. 163 (note 3a).  
Prychidny, October 15, 2008, p. 111; October 14, 2008, pp. 49-52, 72-75, 83-85. 88-90.  
PW-478G  
PW-478G, note 3  
PW-478G, note 3  
500-05-001686-946  
PAGE: 189  
•
a payable to YHLP of $32.4 million, accrued interest on debentures payable to  
shareholders of $218,372 and a receivable from shareholder (YHLP) of $33.4  
8
81  
million .  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
863] At December 31, 1988, $96 million were owed to Castor in relation to MLV (some  
to CHL and some to CHIF):  
Loans owed to CHL  
•
•
•
•
•
•
•
•
•
•
•
•
Loan 1105 to MLVII882 – 3.1 million  
Loan 1048 to YHLP883 – 14 million secured by a pledge of shares  
Loan 1125 to KVW investment (“KVWI”) 884 – 7.2 million  
Loan 1011 to Harling International885 – 3 million  
Loan 1012 to Runaldri S.A.886 – 2 million  
Loan 1013 to Charbocean Trading887 – 4 million  
Loan 1014 to Harling Finance888 – 7.5 million  
Loan 1015 to Gebeau Overseas889 – 5 million  
Loan 1016 to Gebeau Holding890 – 2.420 million  
Loan 1017 to Harling International891 – 3 million  
Loan 1018 to Trade Retriever892 – 2.280 million  
Loan 1019 to Trade Retriever 893– 2.220 million  
881  
882  
883  
884  
885  
886  
887  
888  
889  
890  
891  
892  
PW-478G, note 4  
PW-1053-23-17  
PW-1072-4A; PW-1053-23-8; PW-1053-23-17; PW-1053-23-10 (sequential page 80).  
PW-1073-5A; PW-1073-5; PW-1053-23-8; PW-1053-23-17; PW-1053-23-10 (sequential page 81).  
PW-1053-23-8; PW-1053-23-1 PW-1053-23-10 (sequential page 80).  
PW-1071-6-8; PW-1053-23-1 PW-1053-23-10 (sequential page 80).  
PW-1071-5-1; PW-1071-5-8; PW-1053-23-1  
PW-1053-23-8; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
PW-1071-7-9; PW-1053-23-8; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
PW-1071-4-14; PW-1053-23-8; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
PW-1071-2-10; PW-1071-2-11; PW-1053-23-8; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
PW-1071-8-11; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
500-05-001686-946  
PAGE: 190  
Loans owed to CHIF894  
•
•
•
•
•
•
•
•
•
•
Loan 770001/0009 to Runaldri – 3.678 million  
Loan 26100/0004 to Charbocean Trading – 7.297 million  
Loan 385005/3010 to Gebau Overseas - 8.349 million  
Loan 385009/3005 to Gebau Overseas – 3.320 million  
Loan 385009/0003 to Gebau Overseas – 1.895 million  
Loan 38500/0008 to Gebau Overseas – 0.850 million  
Loan 38500/0004 to Gebau Overseas – 3.704 million  
Loan 441004/3010 to Harling International – 4.5 million  
Loan 441004/0008 to Harling International – 6.697 million  
Loan 890000/0010 to Trade Retriever – 4.617 million  
[
864] Loan 1048 to YHLP was secured by a pledge of 190,200 common shares of  
MLVII and 6,019 preferred shares of MLVII owned by YHLP.  
[
865] Loan 1125 to KVWI was secured by a pledge of 500,000 common shares of  
YHLP and a guarantee provided by YHLP.  
[866] Loan 1105 was an unsecured loan.  
[
867] Loans 1011 to 1019 made by CHL were secured by a pledge of all debentures of  
MLVII owned by the borrowers and the debentures were themselves secured by  
mortgages against the property as well as other assets of MLVII.  
[
868] Loans owed to CHIF, all owed by MLV investors (debenture holders), were  
secured by a pledge of all debentures, all common shares and all preferred shares of  
MLVII owed by the borrower, and the debentures were themselves secured by  
mortgages against the property as well as other assets of MLVII.  
In t er es t s r ecogn ized a s r even u e  
[
869] In 1988, Castor recognized interests totalling $7,195,291.88 as revenue on MLV  
895  
related loans .  
8
93  
94  
PW-1071-9-6; PW-1053-23-1; PW-1053-23-10 (sequential page 80).  
PW-1076A-1  
8
500-05-001686-946  
PAGE: 191  
Loa n s a n d com m it m en t let t er s  
[
870] The terms and conditions of the commitment letters and extension letters as well  
as the loan documentation in connection therewith called for the payment of monthly  
8
96  
interest, annual fees and the supply of financial information . The borrowers were in  
chronic breach of all such covenants.  
MLV a p p r a isa ls  
8
97  
898  
[
871] No 1988 Mullins appraisal existed : the Mullins appraisal was dated 1983 .  
[
872] A valuation of the hotel portion of Maple Leaf Village, dated July 1988, was  
8
99  
prepared by R.W. Hughes & Associates Inc. (the “Hughes report”). The hotel portion  
of MLV, as defined by the Hughes report, included: Foxhead Hotel, Brock Hotel, Village  
Inn, the parking area, and Tussaud’s Wax Museum. It excluded the Shopping Mall and  
9
00  
the Amusement Park .  
[
873] The Hughes report concluded that the estimated current value of the hotel  
portion of MLV, as at July 31, 1988, was in the range of 66.4 to 70.4 million and that the  
9
01  
most probable single value was 67.7 million .  
[
874] The Hughes report also included an evaluation of the property’s future potential  
9
02  
estimated at 104 million on the following basis:  
“
(…) on the owner effectively completing enhancements to the hotels in the  
amount of $4,000,000 to $6,000,000. This is in addition to the $7,300,000 of  
Basic Upgrading required to meet the Pannell Kerr Forster income forecast. In  
addition, this estimate of the property’s future potential includes the owner’s  
proposed new 37,600 square foot retail corridor between Clifton Hill and the  
existing Maple Leaf Village Mall.”  
[
875] In providing a future potential estimated value, the authors of the Hughes report  
included the following disclaimer “There are no guarantees that this level of value will be  
achieved.”  
[
876] The appraisal conclusions of the Hughes report were intended to be read in  
conjunction with a June 1988 Pannell Kerr Forster Market Position Study (the “1988  
8
95  
96  
PW-1075A  
8
For example, see: PW-1071-1 to PW-1071-9; PW-1072 (series); PW-1073 (series) and PW-1074  
(
series)  
897  
898  
899  
900  
901  
902  
Ron Smith, May 16, 2008, pp.53-54  
PW-493  
PW-494  
PW-494, bates 000043  
PW-494, bates 000008  
PW-494, bates 000009  
500-05-001686-946  
PAGE: 192  
PKF Report”)9 which included the assumed increases in revenue of the hotel portion  
of MLV which themselves were based on the properties being upgraded, such  
upgrading being a critical factor.  
03  
[
877] The Hughes report and the 1988 PKF Report were sent to Ron Smith of Castor  
904  
on September 21, 1988 .  
[
878] There was no appraisal available in 1988 for the Shopping Mall and the  
Amusement Park. However, an appraisal for the Shopping Mall which indicated a value  
9
05  
of 26 million was obtained in March of 1989 .  
Ot h er in for m a t ion  
[
879] The renovations which were to be implemented were never completed and the  
906  
hotels were never upgraded .  
[
880] In Prychidny’s words, YH was an absentee owner of what the locals called the  
Make Believe Village”.9  
07  
“
[
881] The operations of the MLV project were seasonal: its peak occupancy period  
was in July and August; its minimum occupancy period, in winter.  
9
08  
[
882] MLV’s operations were problematic.  
Castor not only funded operating  
9
09  
deficits, but had to make systematic and ongoing support payments to lenders in an  
9
10  
attempt to counter foreclosure proceedings .  
[
883] Prychidny testified that as a result of serious efforts to try to sell, only one offer  
911  
.
was received: it was in the amount of $90-100 million, and for the entire MLV project  
an offer not just for the hotels but an offer for the whole complex, which included  
the three (3) hotels, the shopping mall and the amusement park assets, the  
whole seventeen (17) acres site9  
12  
.
[
884] Prychidny added “That was the top and I thought a very reasonable and fair  
913  
price.”  
903  
904  
905  
906  
907  
908  
909  
910  
911  
912  
913  
PW-495  
PW-494-1  
PW-496  
R. Smith, May 15, 2008, pp. 135-149; Prychidny, October 14, 2008, pp.217 and following  
Prychidny, October 15, 2008, pp. 50-51.  
See, for example, PW-1070G-2, PW-1070G-3, PW-1070G-4.  
PW-1070H.  
See, for example, PW-1070F-2, PW-1070F-4, PW-1070F-5.  
Prychidny, October 14, 2008, pp. 210-214  
Prychidny, October 14, 2008 pp.211-212  
Prychidny, October 14, 2008, p.214  
500-05-001686-946  
PAGE: 193  
9
14  
[
885] Wightman never saw the appraisals relating to the MLV project .  
[
886] In the 1988 working papers, Wightman wrote beside his MLV inscription “for sale  
915  
at $90-100 million”.  
Exp er t s ’ evid en ce  
[
887] Plaintiff’s experts (Vance, Rosen and Froese) asserted that a LLP was required  
in respect of Castor’s loans that were secured by and associated with the MLV project.  
[
888] Because of the chronic defaults of Castor’s borrowers in connection with the  
MLV and their obvious inability to service the interest or fees due to Castor, all the  
capitalized interests and fees recorded by Castor in connection with the MLV loans  
should have been reversed - had such reversal taken place, the required LLP would  
9
16  
have been reduced accordingly .  
[
889] In his computation of the proposed LLP, Vance used the total value figure of 93.7  
million: 67.7 million for hotels and museum and 26 million for mall, tower and park.  
Vance mentioned that he had not taken account of the investment in 705743 Ontario,  
9
17  
and he explained why .  
[
890] In his computation of the LLP, Rosen used two approaches taking account of low  
918 919  
and high value figures : 104 million and 115 million .  
[
891] In his computation of the proposed LLP, Froese used the total value figure of  
1
1
6
02.3 million: 67.7 million for hotels and museum, 26 million for mall, tower and park,  
.355 million for current assets, $773,000 for a net receivable from shareholder and  
9
20  
.460 million for an investment in 705743 Ontario .  
[
892] In his report, Goodman namely wrote that:  
•
the MLV properties were distressed properties that were performing  
poorly, and certainly far below the financial projections that were set out in  
the various appraisals, whether with or without the financial support  
arrangements offered by the YH Group;  
•
Castor had to continually “bail out” the YH North American Group in order  
to keep the MLV properties in operation as going concerns;  
914  
915  
916  
917  
918  
919  
920  
Wightman, February 25, 2010, p. 42.  
PW-1053-23-16, sequential page 117  
Vance, PW-2908, Vol. 1, pp. S-8 to S-10.  
Vance, PW-2908, Vol. 2, pp. A-3 to A-5 and Vol. 3, section on MLV.  
PW-3033, volume 2, tab D, p. 6-7  
Rosen, PW-3033, Vol.2, section D, pp.34-38  
Froese, PW-2941, Vol.3, pp.55-56 and PW-2941-4  
500-05-001686-946  
PAGE: 194  
•
Castor capitalized significant interest over the 1988 to 1990 period and  
that as a result, MLV’s loans from Castor increased materially;  
•
The YH Group of companies were insolvent during the 1988 to 1990  
period.9  
21  
[
893] In his computation of the proposed LLP, Goodman used the total value figure of  
1
24.2 million: 117.7 million for hotels, Tussaud’s wax museum, Mall and Amusement  
Park (26 million for Mall and Amusement Park plus 104 million for Hotels, less 12.3  
million for the cost of enhancements and upgrades) plus 6.5 million for the investment in  
922  
05743 (amusement park assets) .  
7
[
894] Concerning any possible sale of MLV during 1988, Goodman said:  
Q.-So during that period of time, isn't it a fact that neither Castor or York-  
Hannover were able to obtain any offer for the entire MLV complex that was  
higher than the ninety (90) to one hundred (100) million dollars that Mr. Prychidny  
testified about from the Okabi group?  
A- I'm not aware of any... any other offer other than the one that Mr. Prychidny  
923  
talked about (…)  
9
24  
[
895] Goodman agreed there was a shortfall in MLV . He assessed the deficiency at  
9
25  
$
21.6 million . He wrote:  
I am of the view that the best estimate of Castor’s security value supporting its  
loans amounted to $75.1 million as at December 31, 1988. After deducting the  
balances outstanding on Castor’s loans, there was a deficiency of $21.6 million  
which would have been recovered from the application of surplus Gambazzi, in  
Trust deposits or from the WOS/KvW guarantees. According to the C&L audit  
working papers, the surplus of Gambazzi, in Trust deposits over Gambazzi, in  
926  
Trust loans was more than sufficient to cover the $21.6 million deficiency  
.
[
896] Goodman concluded that Castor’s assertion that no LLP was required on this  
group of loans was reasonable under GAAP despite the existence of a loan security  
deficiency when considering the property values alone. He opined that two other  
sources allowed him to conclude accordingly: Wersebe and Stolzenberg’s guarantees  
to debenture holders and Gambazzi in Trust deposits.  
[897] Goodman described Wersebe and Stolzenberg’s guarantees as follows:  
921  
922  
923  
924  
925  
926  
D-1312, p. 363  
Goodman, D-1312, p. 347  
Goodman, November 30, 2009, p.91  
Goodman, November 30, 2009, pp.67-68  
D-1312, p. 347  
D-1312, p. 348  
500-05-001686-946  
PAGE: 195  
the guarantees that are... that I'm noting as the KVW and WOS guarantees are  
guarantees that were made to the MLV investors that would allow the MLV  
investors to put their loans back to WOS and KVW in the event that the  
syndication of the MLV investor positions did not proceed in accordance with the  
plans they had in nineteen eighty-one (1981), eighty-two ('82) and nineteen  
927  
eighty-three (1983)  
.
Trade Retriever, under this agreement, is allowed at any time to tender its  
interest in Maple Leaf Village to the guarantors, being Karston Von Wersebe and  
Mr. Stolzenberg, and those two individuals have agreed they will assume all the  
obligations and repay any and all outstanding principal and interest on a  
promissory note on its final maturity, provided that any amounts collected are  
928  
offset against it.  
[
898] Goodman acknowledged that Wersebe and Stolzenberg’s guarantees, to which  
he was referring, concerned only some of the debenture holders and had nothing to do  
with CHL loans to MLVII, YHLP or KVWI.  
I am not suggesting at all that Mr. Von Wersebe guaranteed any of the Castor  
Holdings Limited indebtedness, and just so that we're all on the same page, so  
no, there would not... I'm not suggesting that there was a guarantee by KVW of  
loans 1105, 1126, 1136, 1048 or 11259  
29  
.
[
899] Had MLV been sold and the proceeds been distributed, according to Goodman  
the various debts would have ranked in the following order:  
•
•
•
•
•
Great-West, FICAN and National Bank (34.6 million)930  
CHL debenture holders loans (31.6 million)931  
CHIF debenture holders loans (40.3 million)932  
CHL loans to MLVII (loan 1105)933  
9
34  
CHL loan to YHLP (loan 1048) and CHL loan to KVWI (loan 1125) .  
[
900] When Goodman was asked whether it was consistent with Castor’s intent to sue  
Stolzenberg and Wersebe to collect loans made to debenture holders, he answered: It's  
consistent with Castor's option; I couldn't tell you whether Castor had the intent to sue  
927  
928  
929  
930  
931  
932  
933  
934  
Goodman, November 30, 2009, p. 110  
Goodman, November 30, 2009, p.115  
Goodman, November 30, 2009, p.57  
Goodman, November 30, 2009, p.75-76  
Goodman, November 30, 2009, p.76-77  
Goodman, November 30, 2009, pp.77-78  
Goodman, November 30, 2009, p.78  
Goodman, November 30, 2009, p.78-79  
500-05-001686-946  
PAGE: 196  
Mr. Von Wersebe or Mr. Stolzenberg on this amount. I didn't see anything that indicated  
9
35  
that they intended to do that, all I say is they have the option .  
[
901] In his cross-examination, Goodman acknowledged the Court should not infer that  
each of the CHIF debenture holder loans was guaranteed by Wersebe and Stolzenberg,  
or that each of those loans was pledged by deposits (Gambazzi in Trust deposits).  
I do the same in respect of Gambazzi, and then I stand back and I say, okay, I  
have all of this in front of me, what do I do, do I have a probable loss, yes or no?  
And so...  
Q- But...  
A- ... that's the way I'm looking at it, it's not sort of A plus B plus C plus D.  
Q- Okay. Well, I'm going to ask you, then, again, are you suggesting to the Court  
that the Court should infer that each one of the CHIF debenture holder loans in  
the box MLV.9 were guaranteed by KVW and WOS, even though you don't have  
agreements for those other loans, and are you asking the Court to infer that each  
one of the loans in the box MLV.9 was pledged by deposits? That's my simple  
question.  
A- No.  
Q- Not whether you should take a loss or not.  
A- No.  
Q- So the Court... you're not asking the Court to infer documents that don't exist?  
A- No. No936  
.
[
902] Goodman acknowledged that options totally unrealistic could not and should not  
937  
– as, for example, an enforcement option that Castor would  
be taken into account  
never exercise.  
938  
[
903] All experts used the same two appraisals, but they applied GAAP differently to  
them, and they differed in their consideration of the value of security available to Castor.  
904] Goodman’s analysis9 valued the amusement park rides, which were held by  
39  
[
7
05743 Ontario Ltd., a wholly owned subsidiary of MLV, at 6.5 million, as described in  
9
9
9
9
9
35  
Goodman, November 30, 2009, p. 118  
36  
Goodman, November 30, 2009, p. 131  
Goodman, November 30, 2009, p.106-107  
PW-494, PW-494-1 and PW-496  
37  
38  
39  
Goodman, October 5, 2009, pp.126-160  
500-05-001686-946  
PAGE: 197  
9
40  
also included a 6.5 million loan  
note 10 of MLV’s financial statements. Froese  
security value in respect of these rides. Neither Vance nor Rosen asserted value to this  
asset in their computations.  
[
905] Two main factors make up for the difference of 54 million between Vance’s and  
Goodman’s conclusions on the LLP: 30.5 million in value figures and 21.6 million in  
9
41  
possible recovery through other sources .  
906] The same two factors make up for the difference of 43 million  
9
42  
[
between  
Froese’s minimum LLP and Goodman’s conclusions on LLP: 21 million in value figures  
9
43  
and 21.6 million in possible recovery through other sources .  
907] At least 9.2 million in value figures and 21.6 million in possible recovery through  
[
other sources make up for the difference of 46.3 million between Rosen’s minimum LLP  
9
44  
and Goodman’s LLP conclusions .  
Conclusions  
Va lu e a n d m in im u m d eficien cy befor e ot h er r ecover y s ou r ces  
[
908] In the specific factual circumstances of MLV as herein above described, in light  
of the disclaimer clause of the appraisal report regarding the 104 million value and since  
the hotels were nowhere close to satisfying the basic assumptions used by the  
appraisers (renovations and projected earnings), this 104 million figure cannot  
reasonably be used to value the hotels.  
[
909] Evidence shows that the 1988 market value for the entire MLV project was in the  
range of 90 to 100 million. The offer that was made in August 1988 and the figures used  
9
45  
in preparation of the counter-offer constitute highly relevant value indicators in light of  
Prychidny’s testimony relating thereto, a testimony that the Court finds credible and  
9
46  
reliable . Moreover, said figures were noted by Wightman in the 1988 working papers.  
The Court does not believe Wightman’s testimony that he would have been told that  
9
47  
these figures represented only part of the project .  
[
910] Based on a 100 million total value, the minimum deficiency on MLV is $48.3  
million.  
Ot h er p os s ible s ou r ces of r ecover y  
940  
941  
942  
943  
944  
945  
946  
947  
Froese, January 6, 2009, pp.244-246  
D-1312, p. 360  
Froese, January 27, 2009, pp. 95 and following and PW-2941-4, Schedules 1 and 2  
D-1312, p. 375  
D-1312, p. 383  
PW-499 B  
Prychidny, October 14, 2008, pp. 210-214  
Wightman, February 11, 2010, pp. 201-202  
500-05-001686-946  
PAGE: 198  
[
911] Goodman’s suggestion that there would have been other possible sources of  
recovery to be taken into account by Castor in preparation of its financial statements  
does not hold water. Had it been the case, Castor would not have taken, as it did, a 5  
million LLP on MLV in 1990.  
[
912] The available value to Castor based on Goodman’s figures would have been  
nd rd  
sufficient to cover Castor’s loans ranking in 2 and 3 place, had MLV been sold, but it  
th  
th  
would not have covered Castor’s loans ranking in 4 and 5 places.  
th th  
[
913] Those loans which would have ranked in 4 and 5 places have nothing to do  
with any of Wersebe’s or Stolzenberg’s possible guarantee or Gambazzi’s deposits in  
Trust, as Goodman acknowledged.  
[
914] Needless to say that, in all circumstances, suing Stolzenberg or Wersebe is  
unrealistic – it is an enforcement option that Castor never contemplated and would not  
have exercised.  
Requ ir ed LLP  
[915] A minimum LLP of at least $40 million was required for MLV in 1988.  
YH Corporate loans  
916] The following loans were looked at by all Plaintiffs’ experts under the grouping  
[
“
YH Corporate loans”. They are loans made by Castor and CFAG to YH entities to  
reallocate, on an annual basis, unpaid interest, fees and support payments due to  
Castor by various members of the YH Group. These loans totalling 74.4 million do not  
relate to advances made for completion of a specific project.  
•
•
•
•
Loan 1123 to KVWIL  
Loan 1081 to YHDHL  
Loan 1092 to YHDL  
The CFAG Loans to YH  
500-05-001686-946  
PAGE: 199  
948  
917] Vance also looked at Loan 1091 by CHL to YHDL in the amount of 29 million .  
[
Therefore, he discusses 103 million of YH Corporate loans for 1988.  
[
918] Rosen discusses 124.3 million of “YH Corporate loans” since he looked also at  
the following loans under this grouping:  
•
Loan 1090 to YHDL (Options) – 3.3 million  
Loan 1091 by CHL to YHDL in the amount of 29 million949  
•
•
Various loans made by CHIF to Harling and to KVWIL, for a total of 17.6  
million9  
50  
9
51  
[
919] Froese also looked at “G/L Account  
046/loan 1153” in the amount of 1.8  
million and at Loan 1090 to YHDL (Options) in the amount of 3.3 million. Therefore, he  
9
52  
has 79.5 million of YH Corporate loans for 1988 .  
920] KVWIL and YHDHL were holding companies, and YHDL, an operating company.  
[
Additional evidence specific to the YH corporate loans  
CFAG loa n s (2 0 m illion ) p r ior t o 1 9 8 8  
[
921] In 1981, CFAG made 20 million of unsecured loans to YH by way of five  
separate promissory notes, each bearing interest at prime plus 6% and having a term of  
9
53  
five years and four days from its signature date .  
[
922] These five unsecured loans of 20 million represent virtually the totality of the  
CFAG loan portfolio through the years.  
[
923] On December 16, 1982, an agreement was signed between YHDL, YHHL and  
954  
resulting from five promissory notes  
Investamar in relation to 20 million of debts  
apparently issued in 1981 and maturing at various dates in 1986.  
[
924] In its 1984 audit working papers (“AWPs”), C&L added a handwritten inscription  
on a confirmation letter drafted on Investamar’s letterhead: “After receipt of these conf.  
Investamar SA will confirm to Castor Finanz AG that these confirm were received on  
9
55  
AG’s behalf” . The AWPs indicated that the amounts had been agreed to the general  
ledger (“G/L”) in relation to loans 158004, 158104, 158204, 158304 and 158404 of  
948  
949  
950  
951  
952  
953  
954  
955  
PW-1059-6 and PW-1053-23-3, sequential pages 180-182 and 270  
PW-3033, Vol. 2, Section C, p.4; PW-1059-6 and PW-1053-23-3, sequential pages 180-182 and 270  
PW-3033, Vol. 2, Section C, p.4  
General ledger account  
PW-2941, vol. 4 p. 15  
PW-1177-1.  
PW-1178  
PW-1053-99,sequential page 260  
500-05-001686-946 PAGE: 200  
CFAG to YH. The 5 loans were maturing at various dates during 1986, as per  
9
56  
inscriptions appearing on the unsigned confirmations .  
[
925] In its 1985 AWPs, C&L listed the five loans of CFAG to YH (loans 158004,  
1
58104, 158204, 158304 and 158404). C&L noted that loan 158004 was maturing in  
957  
987 while the other four were maturing at various dates in 1988 - those maturity  
1
dates match perfectly the maturity dates agreed to in the 1982 agreement between  
9
58  
Investamar, YHDL and YHHL . Confirmations on Investamar letterhead were again  
9
59  
with a handwritten note at the bottom of one of those  
included in the AWPs  
confirmations similar to the one made the previous year but for the following words  
9
60  
which were added: “Practice consistent with prior years (Loans I to V)” .  
[
926] In its 1986 AWPs, C&L listed the 5 loans of CFAG to YH (loans 158004, 158104,  
1
58204, 158304 and 158404) with confirmation numbers 5003 to 5007 in the margin  
and maturity dates (1987 for loan 158004 and various dates in 1988 for the other four  
9
61  
loans) .  
[
927] In its 1987 AWPs, C&L listed those 5 loans of CFAG to YH (loans 158004,  
962  
58104, 158204, 158304 and 158404) all maturing in 1988 .  
1
[
928] G/L account 046 was used over the years to capitalize interests in CHL on these  
963  
0 million loans of CFAG .  
2
Accou n t 0 4 6 (Befor e 1 9 8 8 )  
[
929] The YH account (G/L account 046 (“account 046”)) is explained as follows in  
C&L 1985 AWP:  
“
YH’s account gets built up from interest accruing on YH loans, and drawn down  
by being reclassified to new mortgage loans.” “Advance to YH @ P + 6%  
964  
unsecured”  
[930] C&L’s 1986 AWPs include the following explanation of G/L account 046:  
“
This account though gets built up from interest accruing on YH loans & down by  
965  
being reclassified to new mortgages.”  
9
9
9
9
9
9
9
9
56  
57  
58  
59  
60  
61  
62  
63  
PW-1053-99, sequential pages 259 to 264  
PW-1053-97, sequential page 287  
PW-1178  
PW-1053-97, sequential pages 290 to 294  
PW-1053-97, sequential page 290  
PW-1053-95, sequential page 261  
PW-1053-93, sequential page 197  
PW-88; For example see the following exhibits - for 1986, PW-82 bates 000130, 000287 and 000289;  
for 1987, PW-83, bates 000188, 000189, 000261 and 000263; for 1988, PW-84, bates 000183,  
0
00185, 000396 and 000508  
964  
PW-1053-83-5  
500-05-001686-946  
PAGE: 201  
[
931] Each month, journal entry number 6 (“JE# 6”) was recorded to reallocate interest  
income receivable for various YH loans to account 046. Most of the time, JE # 6 was  
supported by detailed memos.  
[
932] By journal entry number 12 (“JE#12”), CHL recorded transactions relating to  
Zug” and, namely, interest income receivable of CFAG on its 20 million loans to  
account 046. Most of the time, JE#12 was supported by detailed memos.  
“
[
933] At year-end, account 046 was reduced by re-allocating the indebtedness to YH  
projects (existing or new loans).  
Ca s t or a n d YH : “equ it y p a r t n er s ” p r ior t o 1 9 8 8  
9
66  
[
934] Whiting explained that Wersebe considered Castor «to be an equity partner» .  
The YH group and representatives surely acted accordingly.  
[
935] Smith explained that the genesis of this unfortunate “partnership” was that from  
the beginning, Castor was the “financing arm” and YH was the “investment arm”. Rather  
than acting as a lender, Castor effectively assumed and inherited all of YH’s risks:  
«
All of the projects that we were involved with, we were basically supplying the  
equity to their positions or secondary mortgage positions, or else we gradually  
took over the first mortgage positions. So, it was always Castor's... Castor was at  
risk, so all of that leverage that York-Hannover had in their own system, they  
effectively transferred over to Castor and it became our risk, and as a result of it,  
there just wasn't enough cash flow coming in to satisfy all of that debt we  
required, all of the debt service that was required on that risk. So, effectively, we  
inherited York-Hannover's leverage and we just kept adding to it to support it, but  
they never corrected the situation, they couldn't sell off their projects fast enough,  
they couldn't generate from their own operations to pay us down, and Castor's  
interest just snowballed and grew, so our own leverage position then got to a  
point where we had to finance interest on interest on interest year after year, and  
what we're doing is basically increasing our own leverage position, and you can't  
live with that forever, you're going to get caught at some point in time.9  
67  
»
[
936] No underwriting standards whatsoever were associated with the granting of  
loans or the systematic renewal of such loans at each maturity date. These loans were  
made because that was the only manner in which Castor could recognize interest and  
9
68  
fee income on outstanding non-performing loans .  
9
69  
[
937] Between 1982 and 1987, CHL assets grew from 111 million to 388 million .  
Significant portions of the increase of assets were loans to the YH group, many of which  
965  
966  
967  
968  
969  
PW-1053-35-6  
Whiting, November 16, 1999, pp. 130-136.  
R. Smith, October 2, 2008, p. 62.  
R. Smith, May 14, 2008, p. 137.  
PW-5A, tab 6 (1982) and tab 11 (1987) (unconsolidated audited financial statements of CHL)  
500-05-001686-946  
PAGE: 202  
were created pursuant to capitalization of interest and year-end re-allocation through  
9
70  
971  
account 046 . CHL’s growth significantly depended on lending to YH .  
1
9 8 6 yea r -en d r e-a lloca t ion  
[
938] By 1986, Castor had run out of YH projects on which to re-allocate the ever  
972  
increasing (snowballing ) YH indebtedness. At year-end 1986, Castor’s loans to YH  
moved primarily from mortgage lending to unsecured equity financing and «further and  
9
73  
further away from the projects» .  
Loa n 1 0 8 1 p r ior t o 1 9 8 8  
[
939] The purpose of this loan of CHL to YHDL (at the time) was described in a  
commitment letter dated December 23, 1986 as follows: “To provide a blanket Fixed  
and Floating Charge Debenture financing on the assets of the Borrower for the purpose  
9
74  
of bridge financing the sale and refinancing of the various assets of the Borrower” .  
This commitment letter was for a $25 million loan at an interest rate of prime plus 6%, a  
factor that an auditor would consider indicative of a high risk loan, according to Froese.  
[
940] Castor and YH had agreed that this loan to YHDL was to be put in place on an  
interim basis only; they intended to substitute later YHDHL for YHDL, as the  
9
75  
borrower .  
[
941] At year-end 1986, loan 1081 was used to transfer 25 million from account 046.  
9
76  
After such transfer, the balance left in account 046 was 2.2 million .  
[
942] Consistent with the plan agreed upon earlier, a commitment letter dated April 14,  
1
987 transferred the 25 million loan from YHDL to YHDHL. The security listed in the  
loan summary included an unconditional guarantee of Wersebe in the amount of 12.5  
million. The loan was also secured by a pledge of YHDHL’s shares, a pledge of YHDL’s  
shares owned by YHDHL and a specific assignment of 30 million of YHDHL’s loan  
receivables. Payments were to be made quarterly, consisting of $375,000 of principal  
st  
plus accrued interest, with the first payment to be made on November 1 1987.  
st  
[
943] Payment was not made on November 1 1987, notwithstanding a specific  
9
77  
demand for payment . Whiting had informed Castor that “the only way York-  
9
78  
Hannover could make the payment would be if Castor lent them the money.”  
9
9
9
70  
71  
72  
PW-88A  
Froese, November 26, 2008, pp.125-130  
Vance, April 9, 2008, p. 178; R. Smith, September 3, 2008, pp. 88-89, R. Smith, October 2, 2008, p.  
6
2
973  
974  
975  
976  
977  
R. Smith, May 14, 2008, p. 56-63 (extract from page 60)  
PW-1054-1  
PW-1054-2  
PW-77 (account 046)  
PW-1054-6-1 and PW-1054-6-2  
500-05-001686-946  
PAGE: 203  
9
79  
[
944] Castor considered calling its loan to YHDHL (loan 1081) as early as 1987 , but  
it never pursued any enforcement actions on any of its YH corporate loans.  
[
945] A commitment letter dated December 15, 1987 increased loan 1081 from 25 to  
980  
0 million .  
3
Loa n 1 0 9 2 p r ior t o 1 9 8 8  
[
946] A commitment letter dated December 15, 1987 described the purpose of a new  
0 million loan to YHDL as follows: “To provide interim financing of $10 million secured  
1
9
81  
by specific assignment of various loan receivables of the Borrower” .  
[
947] The receivables provided as security consisted of receivables from YH  
9
82  
Greenwich Inc., Skyline (1980) and Triumph Hotel limited Partnership .  
948] The commitment letter also contemplated a 5 million personal guarantee from  
[
Wersebe but the item was crossed out in the loan summary attached to the commitment  
9
83  
letter .  
949] The closing documents included an acknowledgement that the 10 million had  
[
been advanced by way of a reduction of the inter-company indebtedness of YHDL to  
9
84  
985  
Castor on December 31, 1987 (a reduction of the balance in account 046 ).  
[
950] At December 31, 1987, the unaudited financial statements for Skyline (1980)  
disclosed a deficit of $10 million and suggested that the receivables from Skyline (1980)  
provided as security to Castor on loan 1092 would not be repaid in the short-term from  
9
86  
normal operations and might be impaired .  
Loa n 1 0 9 0 p r ior t o 1 9 8 8  
[
951] A new loan of 3.3 million to YHDL “to provide interim financing secured by the  
pledge of the Borrower’s options to repurchase a 6.25% interest in the Toronto World  
Trade Center Inc. (“TWTCI”) and repurchase the Skyline Triumph Hotel (“Hotel”)  
together known as the “Options” was granted by a commitment letter dated December  
9
87  
1
5, 1987 .  
9
9
9
9
9
9
9
9
9
9
78  
PW-1054-7  
79  
PW-1054-6-1, PW-1054-6-2, PW-1054-7; PW-1054-8, PW-1054-11  
80  
81  
82  
83  
84  
85  
86  
87  
PW-1054-10  
PW-1060-1, page 2  
PW-1060-1A, Tab 4  
PW-1060-1  
PW-1060-1A, Tab 3  
PW-1056A, page 2  
PW-449  
PW-1061-1  
500-05-001686-946  
PAGE: 204  
[
952] On exercise of the TWTCI option, YHDL would be required to pay $5.9 million,  
9
88  
subject to certain adjustments .  
[
953] On exercise of the Triumph option, YHDL would have amounts to pay – these  
amounts would vary depending on the time period, and failure to exercise the option by  
a certain date would entail consequences (discharge of mortgages and other financial  
9
89  
penalties) .  
Fin a n cia l s it u a t ion - 1 9 8 7 yea r -en d  
[
954] The 1987 AWPs included the September 30, 1986 audited financial statements  
990  
of YHDL . No subsequent financial statements of YHDL were ever sought or reviewed  
by C&L.  
[
955] By the end of 1987, the YH group of companies was experiencing serious  
financial difficulties. Throughout the year, Castor had continued to accumulate unpaid  
interests on a monthly basis into account 046 and the balance in account 046 had to be  
reduced at year-end.  
[
956] Since YH could not meet Castor’s demand at year-end 1987, Castor had no  
choice but to resort to circular transactions (cash circles) to clear account 046 and  
recognize interest revenue on YH loans. Castor delivered two checks payable to  
9
91  
McLean &Kerr in trust in the amounts of $3.3 and $5 million and of these funds, $8.28  
million were returned to Castor and recorded as payments of principal, interests and  
9
92  
fees on loans .  
[
957] Castor did not record any specific LLP for the YH corporate loans in 1987.  
Loa n 1 0 9 2 (d u r in g 1 9 8 8 )  
[
958] In January 1988, The Triumph Hotel Limited Partnership receivables were  
rd th  
replaced with two mortgages (3 and 4 positions) between The Triumph Hotel Limited  
9
93  
Partnership and YHDL .  
959] At the maturity date, in December 1988, loan 1092 was extended for a year (to  
[
9
94  
December 1989) . YHDL provided an additional security – a pledge of its limited  
9
95  
partnership interest in CHR Realty Equities Limited Partnership .  
988  
989  
990  
991  
992  
993  
994  
995  
PW-1061-3  
PW-1060-1B  
PW-1053-27, seq. pp. 164-172.  
PW-1056A-1  
PW-1056A-6 and PW-1056A-7  
PW-1060-1B, Tab 2  
PW-1060-3A-1  
PW-1060-3A-5  
500-05-001686-946  
PAGE: 205  
Loa n 1 1 2 3 (d u r in g 1 9 8 8 )  
[
960] By a commitment loan dated June 15, 1988, Castor agreed to provide a 35  
million loan to KVWIL. The purpose of the loan was “To bridge finance the Borrower’s  
holdings of various subsidiaries and related companies”. The interest rate was prime  
9
96  
plus 6% .  
[
961] The 35 million loan was to be secured by an unconditional guarantee of Wersebe  
for the full amount. However, by addendum, the guarantee was reduced to 12.5 million.  
9
97  
[
962] This loan resulted from a reallocation of account 046 .  
[
963] 20 million of this 35 million loan were reallocated to YHDL, in relation to the  
Hazelton Lanes loan 1091, and 20 million of personal guarantees of Wersebe were  
released.  
Loa n 1 0 9 1 (Ha zelt on La n es ) d u r in g 1 9 8 8  
[
964] In a letter to Castor, addressed to Ron Smith and dated May 6, 1988, McLean &  
998  
Kerr had written about the Hazelton Lanes loan 1091 and its security :  
•
Until the agreement dealing with the delivery of title deeds is terminated, York-  
Hannover Developments Ltd. and its related nominee companies do not have the  
ability to pledge any part of the Hazelton Lanes project to you to secure any  
financing;  
•
An unregistered pledge of the interest of York-Hannover Developments Ltd. or its  
nominee companies in either Hazelton Lanes site or development site will be  
subject to any intervening interests given by York-Hannover Developments Ltd.  
whether in compliance with the Co-Owner’s Agreement and the financing  
documents or not which is registered prior to registration of the pledge to you.  
Notice and registration of the pledges to you will, of course, be an event of  
default with a likely result that the construction lender Confederation Life  
Insurance Company will require that the existing loans will be immediately repaid.  
[
965] Castor held no security interest in any part of the property known as Hazelton  
Lanes, as confirmed in an acknowledgement signed by Stolzenberg on May 31,  
999  
988 .  
1
CFAG loa n s (2 0 m illion ) in 1 9 8 8  
996  
997  
998  
999  
PW-1058-1  
PW-1056B  
PW-1059-2  
PW-1059-4  
500-05-001686-946  
PAGE: 206  
[
966] In C&L’s AWPs, the five loans of CFAG to YH totalling 20 million appeared  
1000  
.
again  
YH bor r ower s ’ in s olven cy - 1 9 8 8  
[
967] The YH borrowers were insolvent1001. YH could only meet its obligations to  
1002  
.
Castor if Castor gave them the money  
[
968] YHDL and the other YH borrowers were incapable of meeting their own  
obligations, even in respect of their overhead expenses, and their survival became  
totally dependent upon Castor’s continued support. The YH Hotels group looked to  
Castor as an owner or equity investor supplying the equity to keep the doors open, not  
1
003  
as the lender whom it was supposed to be, or should have been . When YHHL  
needed funding, it did not approach Castor in the manner that it would have a normal  
lender:  
«
Q-  
Okay. So when you are going to Castor to ask for money, you were  
basically trying to obtain moneys, be it short term or long term, to meet the needs  
that you were faced with.  
A-  
Yes, I was approaching them not as a lender, I was approaching them as  
the owner's representative, depending on which property we're talking about. (…)  
Q-  
So it's in that context that Mr. Von Wersebe told you, like a parent telling  
his child "Go see your mother or your father".  
A-  
"Go see your uncle, I have no money"»1004  
.
[
969] YH borrowers did not and could not provide Castor with audited financial  
statements.  
[
970] C&L did not request to see audited or unaudited financial statements of YHDL,  
YHDHL, KVWIL or other YH entities or net worth statements of Wersebe. In fact, C&L  
did not consider financial statements a necessary tool to perform their audit work and  
1
005  
.
did not consider the borrowers’ capacity to pay  
[
971] YHDL’s auditors refused to accept a personal guarantee of Wersebe as  
satisfactory evidence supporting the value of inter-company receivables for the  
1
000  
001  
PW-1053-91-9, p. BC-1, sequential page 257  
1
R. Smith, May 14, 2008, p. 183; PW-1153; Prychidny, October 14, 2008, pp. 83-85; D-1312, ES-25,  
1
54  
1002  
1003  
1004  
1005  
R. Smith, May 14, 2008, p. 196.  
Prychidny, October 14, 2008, p. 74.  
Prychidny, October 16, 2008, 100-101  
Quintal, February 19, 1997, pp. 39-44; December 1, 1995, pp. 85-95; Belliveau, April 1, 1996, pp. 98-  
103; Quesnel, November 24, 1995, pp. 147-155; Wightman, September 27, 1995, pp. 36-38  
500-05-001686-946  
PAGE: 207  
1
006  
and Whiting was surprised that the draft adverse  
purposes of the 1988 aborted audit  
1
007  
.
opinion did not disclose even greater write-offs  
YHDL – 1 9 8 8 fin a n cia l s t a t em en t s - a d ver s e a u d it op in ion  
[
972] A draft auditors’ report expressing an adverse opinion on the 1988 financial  
1008  
,
statements of YHDL was prepared by Thorne Ernst & Whinney (YHDL’s auditors)  
but it was never issued as Thorne Ernst & Whinney were dismissed as YHDL’s auditors.  
[
973] The draft audit report proposed a going concern disclosure, provisions for  
reductions in value and a provision for future losses that together totalled $99.6 million,  
a deficiency in shareholders’ equity of $70.7 million and an adverse audit opinion (that  
1
009  
.
the financial statements do not present fairly in accordance to GAAP)  
Accou n t 0 4 6 (1 9 8 8 )  
[
974] C&L 1988 AWPs included the following comment regarding account 046, similar  
1010  
:
to comments written in the previous years  
“
This account gets built up from interest accruing on YH loans and down by being  
1011  
.
reclassified to new mortgage loan”  
[
975] In 1988, account 046 had built up to approximately 30 million. By using journal  
entries, management reallocated approximately 29 million of account 046 to create a  
new loan to KVWIL (loan 1123). Later, other loans were readjusted and loan 1123 was  
reduced to 14.3 million while the Hazelton Lanes loan to YHDL (loan 1091) was  
increased to 29 million.  
1
9 8 8 Yea r -en d “ca s h cir cle”  
[
976] Circular movement of funds occurred again in 1988.  
1006  
1007  
1008  
1009  
1010  
1011  
Whiting, June 7, 2000, p. 17-21  
PW-1148A; Whiting, March 28, 2000, pp. 76-77  
PW-1148A  
PW-1148A  
PW-1053-83-5; PW-1053-35-6  
PW-1053-23-20  
500-05-001686-946  
PAGE: 208  
[
977] On December 22, 1988, CHL advanced $10,073,425 to its attorneys, McLean &  
Kerr, which it recorded as a loan to TWTCI (loan 1120). Those funds were used to pay  
various amounts owed to CHL, who received them from McLean & Kerr and recorded  
1
012  
:
them in its cash receipt journal, on December 22, 1988, as follows  
Debtor  
Nature  
Amount  
Relating to  
2
23356 Alberta  
interest & fees  
interest & fees  
interest and fees  
interest and  
principal  
$ 104,877  
274,487  
Southview  
Serel  
Serel  
Skyline 80  
YHDL  
995,586  
Ottawa Skyline  
Corporate Loan  
3,665,502  
KVW Investments  
YHDL  
principal  
3,250,000  
708,050  
Corporate Loan  
Accrued Interest  
interest, fees &  
A/C046  
TOTAL  
$
8,998,502.  
[
978] Castor did not record any specific allowances for LLP for any YH corporate loans  
in 1988.  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
979] At least 108.5 million of “YH Corporate loans”, specifically reviewed by Plaintiff’s  
experts, was owed to Castor as of December 31, 1988:  
•
•
•
•
•
•
Loan 1123 to KVWIL – 14.4 million1013  
Loan 1081 to YHDHL – 30 million1014  
Loan 1092 to YHDL – 10 million1015  
Loan 1091 to YHDL - 29 million1016  
Loan 1090 to YHDL – 3.3 million  
Account 046/Loan 1153 – 1.8 million  
1012  
1013  
1014  
1015  
1016  
PW-95, bates #000212 & #000213  
PW-1053-23-2, sequential pages 248-250 and 272; PW-1058-1  
PW-1053-23-1, sequential pages 211-212; PW-1054-3 and PW-1054-10  
PW-1053-23-4, sequential pages 209-210-279; PW-1060-1 and PW-1060-3  
PW-1059-6 and PW-1053-23-3, sequential pages 180-182 and 270  
500-05-001686-946  
PAGE: 209  
•
CFAG loans to YH – 20 million1017  
.
In t er es t s r ecogn ized a s r even u e (1 9 8 8 )  
[
980] In 1988, $19,113,196.38 of interest was recognised on loans used for year-end  
1018  
reallocations of the YH group indebtedness.  
Loa n s a n d com m it m en t let t er s  
[
981] The commitment letters and loan agreements which C&L supposedly reviewed  
called for audited and unaudited financial statements of the borrowers to be provided to  
Castor1  
019  
.
[
982] The YH borrowers did not pay interests or fees to Castor on their loans as called  
for in the loan covenants. If it was not all the interest due to Castor that was capitalized  
1
020  
.
or funded by Castor, it was certainly close to 100%  
Book s a n d r ecor d s  
[
983] The books of original entry disclosed that the interest and fees on the YH  
corporate loans were not being paid in cash, but were being systematically  
capitalized1  
021  
.
[
984] The General Journal disclosed that interest on a series of loans to YHDL was  
1022  
being capitalized each month to account 046 . It also disclosed that interest on the  
YHDL portion of the Meadowlark loan was being similarly capitalized until 1990 and that  
YHDL’s guarantee of the MLV debenture holders’ obligations to CHIF was being  
1
023  
.
satisfied in a similar fashion through the inter-company Zug/Enar account (JE#12)  
[
985] The cash receipts journals disclosed that virtually no interest was being collected  
in cash on a monthly basis notwithstanding the loan covenants that called for monthly  
1
017  
018  
PW-1053-91-9, p. BC-1, sequential page 257  
1
PW-1056F Namely, on the YH Corporate loans discussed in the present section, the following  
amounts : for loan 1123, $3,006.156.71 ; for loan 1081 - $5,292,584.77; for loan 1092 -  
$
1,327,534.27; for loan 1091 - $1 ,278,787.67; for loan 1090 -$553,902.75  
1019  
1020  
1021  
1022  
1023  
For example, PW-1058-1, PW-1063-1, PW-1054-3-1, PW-1059-6  
R. Smith, May 14, 2008, pp. 138-139  
PW-2908, Vol. 1, p. 5-12; PW-1485R; Vance, March 6, 2008, pp. 147-155.  
PW-87.  
PW-100, pp. 41, 47.  
500-05-001686-946  
PAGE: 210  
payments of interests. The General Journal disclosed, in December of each year, the  
1
024  
.
year-end reallocations from account 046 to existing or new YH loans  
[
986] In 1988, CFAG’s accounting ledger did not specify the names of the borrowers of  
1025  
showed  
what were then five loans totalling 20 million although the working papers  
that the loans were due by “York-Hannover”.  
Wer s ebe’s gu a r a n t ees  
[
987] At December 31, 1988, Wersebe had given the following guarantees relating to  
YH Corporate loans:  
•
•
15 million relating to YHDHL loan 10811026  
12.5 million relating to KVWIL loan 11231027  
[
988] The draft auditor’s report of the 1988 YHDL financial statements indicates a  
1028  
.
shareholder’s deficiency of $70.7 million  
[
989] Castor’s ability to realize on Wersebe’s guarantee was limited1029. In a letter  
dated February 9, 1989 Whiting wrote to Stolzenberg that “the express agreement  
between the parties was that Mr. von Wersebe’s European holdings not be brought in  
1
030  
under the share pledge provisions of the guarantee” . Through a document entitled  
acknowledgment”, Stolzenberg agreed that Wersebe’s European holdings were not  
included in the share pledge provisions of the guarantees given relating to loans 1081  
“
and 11231  
031  
.
[
990] C&L did not review information on the net worth of Wersebe or on the legal  
enforceability of his personal guarantees.  
Ot h er in for m a t ion  
[
991] Mackay testified that he understood that Castor could not consider taking a loan  
loss provision on one YH loan because a provision would then have to be taken on all of  
1
032  
them . Smith said he was not permitted to take loan loss provisions on any YH  
loans1  
033  
.
1024  
1025  
1026  
1027  
1028  
1029  
1030  
1031  
1032  
1033  
PW-84, bates p. 000573  
PW-1053-91-9, p. BC-1  
PW-1054-3 and PW-1054-10  
PW-1058-1  
PW-1148A  
Whiting, November 16, 1999, pp.118 and following  
PW-1058-2  
PW-1058-4  
Mackay, August 24, 2009, pp. 173-175.  
R. Smith, May 14, 2008, pp. 124-126.  
500-05-001686-946  
PAGE: 211  
[
992] Prychidny testified that YH European entities made it clear they were not  
1034  
prepared or able to support loans made by Castor to the YH North American group;  
they were rather hoping for those entities to provide them with the financial support they  
needed1  
035  
.
[
993] Interest owing on the YH corporate loans was recognized through the vehicle of  
1
036  
.
capitalization of interests or year-end circles of funds  
994] YH never produced consolidated financial statements.  
[
Exp er t s ’ evid en ce  
[995] The minimum LLP required according to Plaintiff’s experts was:  
Expert  
Vance  
Froese  
Rosen  
Minimum LLP  
77.7 million1037  
60.4 million 1038  
79 to 91million1039  
[
996] In his analysis of the YH Corporate loans for 1988, Froese did not include loan  
1
091 related to Hazelton (in the sum of 29 million). Rosen, on the other hand, included  
7.7 million of CHIF loans, which were not addressed by the other experts. When  
1
adjusted for purposes of comparison, taking account of those differences, the estimates  
of Plaintiff’s experts all fall within a reasonable and consistent range.  
[
997] Plaintiff’s experts also opined that all of such loans should have been placed on  
a non-accrual basis, since there was no reasonable assurance of collectability. The  
revenue on the YH corporate loans that should have been reversed to comply with  
1
040  
GAAP amounted to $14.7 million according to Vance . Experts added that had such  
revenue been reversed as required under GAAP, the loan loss provisions referred to  
above would have been reduced accordingly (to avoid double counting).  
Va n ce  
1034  
1035  
1036  
1037  
1038  
1039  
1040  
Prychidny, October 14, 2008, pp. 50-51.  
Prychidny, October 14, 2008, pp. 50-52  
PW-1056F  
PW-2908, Vol. 1, S-8  
Froese, January 27, 2009, pp.95 and following and PW-2941-4, schedules 3 and 4;  
PW-3033, Vol. 2, Appendix C, p. 3, Approach A (unadjusted).  
PW-2908, Vol. 1, S-8, S-9 and S-10. The revenue reversals calculated by Dr. Rosen were of a similar  
magnitude, see PW-3033, Vol. 2, pp. 6-7. See PW-2941, Vol. 4, pp. 26, 82; See also PW-1056F  
500-05-001686-946  
PAGE: 212  
[
998] Vance calculated that Castor’s exposure to YH Corporate loans in 1988 was  
1
041  
and he described the methodology he had followed to assess the  
1
03.4 million  
1
042  
.
required LLP at 77.7 million  
[
999] Vance included the Hazelton Lanes loan in his YH Corporate loans because  
Castor could not register its security against the project; he did consider that Castor  
1
043  
.
could recover some amount from this project and he accounted for that recovery  
[
1000] Vance looked at Wersebe’s personal guarantees and concluded they had no  
1044  
.
value  
•
In examination in chief, he explained his conclusion as follows:  
With respect to the working papers and the personal guarantee of Karsten Von  
1045  
Wersebe, I'm aware that a personal balance sheet has been filed at D-848  
and that included Canadian assets, primarily Canadian assets and European  
assets. The Canadian assets were basically the York-Hannover Developments  
Ltd. group and York-Hannover Developments being the prime operating  
company, and as we've just seen in my calculations with respect to York-  
Hannover Developments Ltd., well firstly, it was subject in nineteen eighty-eight  
(
1988) to an adverse opinion, a draft adverse opinion by the auditors who never  
them complete it, but that adverse opinion had indicated that there was  
approximately one hundred (100) million of write-offs or additional expenses that  
should be taken, so that would in effect in my view eliminate any value to York-  
Hannover Developments Ltd., and also, in my own calculations, there was no  
value to the equity in that company. It could only make a partial payment to its  
unsecured creditors.  
And with respect to the European assets, PW-1058-4 is an acknowledgement  
that is signed by Castor, by Mr. Stolzenberg, it's dated nineteen eighty-nine  
(
1989), but it indicates that the European, in effect the European assets of Mr.  
Von Wersebe would not be available to honour the guarantee.  
And lastly, the auditors had not carried out any work with respect to that  
guarantee and didn't undertake to try and give it value, although when I did look  
at it, in my opinion, the other thing that has to be borne in mind, you're dealing  
with a sophisticated businessman, who's knowledgeable of secrecy jurisdictions  
and a creditor proofing, and before you would accept the personal balance sheet,  
you would want to make sure that you... there was a way you could get your  
hands on that collateral, it wouldn't be sheltered in some way, shape or form.  
1041  
1042  
1043  
1044  
1045  
Vance, April 14, 2008, p.18  
Vance, April 14, 2008, pp.68 to 141  
Vance, April 14. 2008. p. 23 and 141-142  
Vance, April 14, 2008, pp.142  
The objection to the production of this exhibit (OSR # 126) has been maintained by judgment of this  
day  
500-05-001686-946  
PAGE: 213  
And lastly, Coopers did not do anything with respect to that guarantee at all1046  
.
•
In cross-examination, he added:  
But I think the comment I'm trying to make is he was an individual, certainly of  
foreign extraction, well-versed in the use of foreign jurisdictions and secrecy  
jurisdictions and creditor proofing, and if you have another... And the point further  
down, if the amount of assets in other foreign jurisdictions are material, I think  
that's regardless of whether it's a Canadian resident or foreign resident, you  
would have to be able to seek a legal opinion as to the ability to enforce the  
guarantee over those assets1  
047  
.
[
1001] Vance acknowledged that he had not conducted an investigation of Wersebe,  
whether he owned European companies that owned assets in North America or whether  
he was carrying on business in North America other than that which concerned the  
North American YH group of companies. According to Vance, Wersebe’s Canadian  
assets had all been used for the reorganization of KVWIL, and Wersebe conducted his  
Canadian or North American operations through YH or KVWIL, and his European  
operations through KVW Holding AG in Zurich, and those operations were kept  
apart1  
048  
.
Fr oes e  
[
1002] The following financial statements have been used by Froese in his YH  
Corporate loans section:  
•
for KVWIL : PW-1136-4 (1987), PW-1136-5C (1988), PW-1138-1 (1989)  
and PW-1136-5A (1990)  
•
•
•
•
for YHHHL : PW-1140 (1986)  
for YHLP : PW-1139 (1988 including comparative for 1987)  
for YHDHL : PW-1138-2 (1990)  
for YHDL: PW-1148 (1988), PW-1148a (1988) and PW-1149 (1989)  
1046  
1047  
1048  
Vance, April 14, 2008, pp.142-144  
Vance, July 7, 2008, pp.208-209  
Vance, July 7. 2008, pp.281-221  
500-05-001686-946  
PAGE: 214  
[
1003] Froese prepared a schedule of combined pro forma balance sheets of the  
holding companies of YH (KVWIL and YHDHL) and an overview of their situation, as of  
1
049  
December 31, 1988 . He included also YHLP‘s assets. The result showed a deficit of  
1050  
24.9 million . Even if some adjustments had to be made (due to surpluses from  
1
projects like MEC, for example), Froese opined that a huge part of said deficit would  
1
051  
never be eliminated . In such a situation, Froese concluded that KVWIL and YHDHL  
could not reimburse all of their debts, and that LLPs were needed on loans 1123 and  
081($44.4 million)1  
052  
.
1
[
1004] Froese looked at YHDL’s capacity to reimburse loans 1090, 1092,  
account046/loan 1153 and the CFAG loans and concluded that YHDL was not able to  
do so. Froese mentioned that, even if 1987 and 1988 had been very good years for real  
1
053  
estate, YHDL was barely making enough money to cover its interests . The  
1
054  
difficulties, identified in the draft adverse audit opinion, were very serious . Froese  
1
055  
.
concluded that YHDL’s shares had no value throughout the 1988-1990 periods  
[
1005] Froese added that placing the loans on a non-accrual basis together with the  
magnitude of the increase in LLPs created uncertainty as to Castor’s ability to continue  
as a going concern.  
1
056  
[
1006] Froese opined that Wersebe’s personal guarantee had no value in 1988.  
In  
his cross-examination, Froese emphasized the fact that Wersebe had never pitched in  
even though YH had very serious financial difficulties, and he concluded that it was a  
significant indicia1 . Froese also explained:  
057  
A- (…) over the eighty-eight ('88) to ninety ('90) period, whenever additional cash  
was required for one of the York-Hannover groups, or not whenever but many of  
the times, Castor funded it. So even back in nineteen eighty-seven (1987), when  
the first payment is due on York-Hannover Development Holdings Limited loan to  
Castor, the comment comes back, York- Hannover can't pay it, Castor has to  
fund the payment.  
And throughout the eighty-eight ('88) to ninety ('90) period, there was no  
demonstrated ability of York- Hannover to pay its liabilities as they came due,  
and normal prudent lenders look to the owners to contribute funds in those times,  
so if you do have a valid personal guarantee, you've got an ability to force an  
injection of capital, normally you would use that as a lender, and over that period,  
1
1
1
049  
050  
051  
PW-2945; Froese, November 26, 2008, pp. 143 and following  
PW-2945  
Froese, November 26, 2008, pp. 155-156; see also Froese, January 8, 2009, pp.209 – 222 and  
Froese, January 9, 2009, pp.31-59  
1052  
1053  
1054  
1055  
1056  
1057  
Froese, November 26, 2008, pp. 157-158  
Froese, November 26, 2008, pp.163  
PW-1148A  
Froese, November 28, 2008, pp.65-66  
Froese, December 5, 2008, pp.14 -18; Froese, January 12, 2009, pp. 47-50  
Froese, January 12, 2009, p.71  
500-05-001686-946  
PAGE: 215  
it didn't appear that Castor was able to access any of Mr. Von Wersebe's  
personal assets in that period. So I've also considered that in my opinion of the  
value.  
Q- Was able to access or decided not to access those personal assets?  
A- Either one would be similar, because when you look at the... I mean, if both  
the ability to enforce it and the motivation to enforce it, so you need both1  
058  
.
Ros en  
[
1007] Rosen described the relationship between Wersebe and Stolzenberg and opined  
that Wersebe had a significant influence on Castor.  
if we go to PW-1054, tab 7, and you look at some of that correspondence, and  
it's around the time of selling the shares, so he makes a statement something  
along the lines that "the only way I can pay you is if you give me a loan".  
So in that type of arrangement, what else you're going to say other than, if Castor  
does not keep York -Hannover alive through giving more money and the whole  
thing goes down, then Castor is going to have to report losses on its financial  
statements and that's going to end Castor as a... in my opinion, anyway, as a  
vehicle to use the financial statements to attract money and, therefore, it won't  
survive.  
So you can call it a stranglehold if you want, but I just can't, from that type of  
comment, and then we can go through other arrangements where the  
transactions are going back and forth, the nine (9) loans at the end of nineteen  
ninety (1990), that's another consideration, just steps that were taken to curtail  
Mr. Von Wersebe's spending of Castor money, so certain reorganizations that  
took place.  
I think the evidence piles up to me to say that the influence was very high and the  
cost to Castor of not bending to what Mr. Von Wersebe wanted was just too  
1059  
drastic to consider  
.
[
1008] Rosen explained why, in his opinion, Wersebe had such influence on Castor  
while Castor had not that much influence of YH. Moreover, he enunciated that  
Wersebe’s influence negatively impacted Castor’s ability to continue to operate as a  
going concern.  
So that Mr. Von Wersebe, I think was very clever or sneaky, dependent on your  
point of view, of being able to get Mr. Stolzenberg in a position where he had no  
choice, and when you have no choice, that, to me, is a very significant influence  
and forcing the decisions to come your way, the York-Hannover and KVW way.  
So it's... the relationship was, as I mentioned a few minutes ago, virtually a  
1
058  
059  
Froese, January 12, 2009, p.39  
Rosen, April 6, 2009, pp.54-55  
1
500-05-001686-946  
PAGE: 216  
stranglehold in the situation and Mr. Von Wersebe had considerable power as a  
result.  
Q- And so did Castor over York-Hannover, correct, equally?  
A- Well, I don't think it had that much in that sense because KVW as a company,  
sort of the top company itself and all the other parts of that relationship were  
just in very serious financial conditions. So Castor I don't think had much  
power, the assets could not, in my opinion, have been sold for very much  
and, on that basis, it would have been the end of Castor to have called any  
1060  
loans  
.
[
1009] Rosen gave no value to Wersebe’s personal guarantee. In his cross-examination  
and in no uncertain terms, he disagreed that some evidence showed “fairly extensive or  
significant net worth of Wersebe”:  
A-If you want to look at the net worth statements and go through them in detail,  
somebody who's giving some high value, for example the York-Hannover  
Developments Limited, when the evidence is showing that they're just mass of  
financial problems in there, you have to look at the net worth statement and say,  
"
This is ridiculous".  
Q- All right. So this was not... the value of the personal guarantees is not  
included in items where you were prepared to give the benefit of the doubt;  
correct?  
A- Well, this would not be given in the benefit of the doubt. That would have to be  
a massive Santa Claus to...1  
061  
Good m a n  
[
1010] Goodman is the only expert who opined that no LLPs were required on the YH  
Corporate loans: he concluded accordingly opining that Castor was entitled to consider  
in its aggregation of YH group of loans various surpluses within the group (including  
MEC) and the guarantees of Wersebe.  
[
1011] Goodman opined that from 1988-1990, the 20 million loans owing to CFAG were  
actually owed by Investamar. He concluded that Investamar had acted as a borrower  
(
from CFAG) and as a lender (to YH), as there was no indication in the 1982  
1062  
that Investamar was acting merely as an agency.  
agreement  
[
1012] Goodman concluded that Investamar was not just a conduit, but an entity acting  
as a principal in this 20 million loan transaction. Therefore, it was necessary under  
1060  
1061  
1062  
Rosen, April 6, 2009, pp.57-58  
Rosen, April 8, 2009, p. 34  
PW-1178  
500-05-001686-946  
PAGE: 217  
GAAP to evaluate its financial strength before any LLP be taken. In the absence of  
information relating thereto, Goodman opined that the loans had to be carried at cost.  
Conclusions  
[1013] Plaintiff’s experts position on the CFAG loans must prevail:  
•
20 million were owed by YH to CFAG notwithstanding the agreement signed in  
1
063  
and the confirmations relating to those loans written on  
1
982 with Investamar  
Investamar letterhead. Investamar only acted as “a conduit”, as evidenced by the  
handwritten notes in the AWPs of C&L of 1984 and 1985 and the various  
inscriptions to account 046.  
•
The confirmation letters onto which the handwritten notations were made in 1984  
1
064  
.
and in 1985 indicated they had to be returned to the lender’s auditors  
C&L were not Investamar’s auditors but CFAG’s auditors.  
•
•
In its AWPs, C&L described those loans as loans of CFAG owed by YH, never as  
loans owed by Investamar.  
[
1014] Castor and YH did not behave as one would expect them to, had their  
relationship been an arm’s length commercial lending one. In fact, Castor and YH were  
“
equity partners” developing, operating or managing various properties. Because YHDL  
and its related entities became hopelessly insolvent, Castor could not and did not  
enforce its securities - such a course of action would have led to the collapse of Castor  
1
065  
.
and the crystallization of hundreds of millions of dollars of losses  
[
1015] Various agreements and side deals between Castor and Wersebe limited  
Castor’s ability to realize on Wersebe’s personal guarantee.  
[
1016] One of the cornerstones of Goodman’s opinion that the YH Group loans were not  
misstated in accordance with GAAP is that even though there were significant  
deficiencies on various loans that he reviewed, it was not necessary to take any loan  
loss provision in respect of such deficiencies because there existed alleged “surplus  
positions” in other YH loans. Goodman namely overcame deficiencies in connection  
with the CSH loans (of $11.9 million, $20.2 million and $23.4 million) by resorting to this  
1
066  
theory . For instance, he suggested that surpluses he calculated in relation to the  
MEC property be taken into account.  
[
1017] Goodman testified as follows:  
1063  
1064  
1065  
1066  
PW-1178  
PW-1053-99, sequential pages 260 to 264  
R. Smith, May 14, 2008, pp. 139-140, 206-207  
D-1312, pp. 429-430.  
500-05-001686-946  
PAGE: 218  
My analysis, as I just pointed out, was that there were surpluses, or loan security  
surpluses, in each of the years nineteen eighty-eight (1988), nineteen eighty-nine  
1989) and nineteen ninety (1990) in respect of Castor's loans, and that those  
surpluses were important in the overall consideration of the overall York-  
(
Hannover position vis à vis Castor1  
067  
.
any GAAP assessment of the overall York- Hannover group, My Lady, required  
an analysis of at least all of the major loan positions within that grouping and  
certainly TWTC was a... was a major... TWTC loans were very significant.1  
068  
[
1018] Vance testified that Goodman’s theory regarding offset did not constitute GAAP  
and that «no auditor should accept such approach absent of valid, legal cross-  
1
069  
collateralization agreement supported by valid security».  
[1019] To the same effect, Froese testified as follows:  
you do have to consider all the loans to see if you've missed any loans that  
require an allowance, but unless you have participation agreements that give  
you... give you the ability to receive more back than the amount of the loan, you  
don't have to consider all of the loans to determine whether or not you need an  
allowance on certain loans, you only need to consider all of the loans if you can  
get paid back more than the amount of the loans on some of the loans and I  
understand that these loans didn't have participation agreements and there  
wasn't the ability to get paid back more than the amount of the loan.(…)  
All I was commenting on is you're not going to get to a lower number, but  
considering more loans, you'd get to a higher number for an allowance, unless  
you have loans that have participations or some way of getting paid back more  
than the face amount of the loan. (…)  
the surplus would be a situation where you could get paid back more than the  
1070  
amount of the loan. (…)  
[1020] The Court shares Vance’s and Froese’s point of view.  
[
1021] Goodman acknowledged that he agreed with Vance “that the York-Hannover  
1
071  
Group of companies were insolvent during the 1988 to 1990 period”.  
[
1022] Castor’s very own practices, with respect to the loans to the YH Group, did not  
contemplate the possibility of an offset in situations where security had not been  
granted or new loans had not been issued by Castor.  
1067  
1068  
1069  
1070  
1071  
Goodman, September 23, 2009, p.177  
Goodman, September 24, 2009, p.43  
Vance, April 12, 2010, p. 242.  
Froese, January 9, 2009, pp.58-59  
D-1312, p. 363.  
500-05-001686-946  
PAGE: 219  
[
1023] Whenever Castor wished to clear account 046, or other outstanding  
indebtedness existing at year-end in respect of the YH loans, it negotiated with YH to  
grant loans and to obtain security. In each case, where new security was granted, the  
loan agreements clearly stipulated such security.  
[
1024] When Castor specifically intended to allow for offset as secondary security, it  
1072  
.
stipulated such right in the loan agreement  
[
1025] When Castor acknowledged deficiencies on various YH loans, such as in the  
1073 1074 1075  
and MLV , it recorded  
case of Airport Corporate Center (“ACC”) , Meadowlark  
loan loss provisions and did not purport to apply alleged security surpluses on other  
loans in Castor’s portfolio.  
[
1026] Castor looked at the projects (or properties) as separate groupings. For example,  
in the case of the TSH and the CSH, separate grid notes were set up to capitalize  
unpaid interest, fees and expenses that accumulated in connection with such  
projects1  
076  
.
[
1027] Castor knew how to enter into agreements with its borrowers that provided it with  
1077  
the right to participate in any potential “surplus” on a project.  
[
1028] In its internal document AM-50, C&L acknowledged that the lower of cost and net  
realizable value test should be applied on a “parcel-by-parcel” basis, unless parcels  
were interrelated. C&L valued the loans and purported to determine whether LLPs were  
required during its audits of Castor accordingly, namely those of 1988, 1989 and 1990.  
[
1029] On one hand, when C&L considered that the loan documentation provided for a  
right of offset, the auditor specifically documented such right. For example, in the audit  
working papers of CHIF for 1986, Wightman indicated that there was a right of offset in  
1
078  
As an example, he referred to a loan by CHIF to  
respect of certain specific loans.  
First Holdings where he considered that a right of offset existed. C&L presumably relied  
on the security agreement with such borrower which provided for a pledge of listed  
assets.1  
079  
1
1
1
072  
073  
074  
PW-3089.  
Ron Smith, March 27, 2009, pp.62-63  
In 1989- a LLP of $576,436 was taken on Loan 1117 to Leeds; In 1990 – a LLP of $ 2 million was  
taken on Loan 1030 to Leeds  
1
075  
076  
A LLP of 5 million was taken in 1990  
1
See namely – for TSH: Account 066 and Loan 1148 (PW-167D); Ron Smith, June 11, 2008 ; Ron  
Smith, September 3, 2008; for CSH : PW-1086 A, PW-1086 B, PW-1086C, PW-1087, tab 6; Ron  
Smith, September 3, 2008; Ron Smith, September 5, 2008; Account 066 and loan 1147  
For example, see PW-1102A-4 and Ron Smith, September 15, 2008, p. 131.  
PW-1053-3, seq. pp. 473-478.  
1077  
1078  
1079  
D-579  
500-05-001686-946  
PAGE: 220  
[
1030] On the other hand, C&L never considered, nor did Castor ever advise C&L, that  
any right of offset existed between, for example, deficiencies in respect of the Skyline  
Hotels and an alleged security surplus on MEC or deficiencies in respect of KVWIL and  
YHDHL and the “value” of shares and debentures of Castor held by Raulino.  
[
1031] Furthermore, although loan loss provisions were recorded during the relevant  
years, C&L never once purported to apply such alleged surpluses to situations where  
loans were provided for or written off.  
[
1032] At trial, on February 9 and 10, 2010, Wightman testified he generally felt that  
1080  
and that he understood  
surpluses from other projects were available for other loans,  
1
081  
that capitalized interest was being reallocated onto projects with the most security.  
However, fifteen years earlier (on discovery in October 1995) while the facts should  
have been fresh in his memory, he was completely unaware of the details of the  
1
082  
and never mentioned the availability of surpluses on  
process of interest reallocation,  
other projects.  
[
1033] Not one of the C&L audit staff members who testified asserted that he or she  
believed that alleged security surpluses on one project could be used to offset a  
deficiency against another project where no cross-collateral guarantee existed.  
[
1034] In addition to all of the outstanding indebtedness due to Castor, which would be  
in default and on which interest could no longer be recognized, had Castor  
contemplated a “dation en paiement” of the MEC project in any of the relevant years,  
(
1988, 1989 or 1990) Castor would have had:  
•
•
•
to reimburse the first mortgage lenders;  
to fund the costs to complete the construction; and  
to provide new security to its lenders to whom the $50 million second mortgage  
bonds had been assigned.  
[
1035] Castor neither had the means nor the intent or the capacity to act accordingly. As  
Ron Smith said, such a course of action would have caused the immediate demise of  
YHDL and of Castor.1  
083  
[
1036] Goodman acknowledged that when an accountant matches one exposure  
against another, it must be «based on the facts, it can’t just be some invention of  
facts».1  
084  
1
080  
Wightman, February 10, 2010, pp. 53-55  
Wightman, February 9, 2010, pp. 116-117  
Wightman, October 18, 1995, pp. 47-50.  
Ron Smith, May 14, 2008, pp.206-207  
Goodman, October 26, 2009, p. 52  
1
1
1
1
081  
082  
083  
084  
500-05-001686-946  
PAGE: 221  
[
1037] Goodman’s theory presupposes that, even in the unlikely event that one of  
Castor’s borrowers would repay its loan to Castor, any potential surpluses associated  
with the property would still somehow accrue to Castor rather than to the borrower. The  
Court does not accept such a suggestion.  
[
1038] The only liability that each borrower of Castor had was to repay its loan. Once  
that obligation was fulfilled, absent a specific agreement, Castor had no right to share in  
any potential upside associated with the property.  
[
1039] Goodman, who purports to rely on “lender’s intent”, ignores the fact that when  
Castor and YH “intended” that Castor could participate in any surpluses, they entered  
into a contract to that effect.  
[
1040] In all of the situations relied upon by Goodman to apply alleged potential  
surpluses to other deficiencies, no such contracts existed.  
[
1041] Finally, Goodman’s theory of surpluses relies totally on Goodman’s  
understanding and assessment of Castor‘s bargaining position or alleged capacity to  
apply pressure or alleged capacity to enforce a recovery scenario –such as the scenario  
of “dation en paiement” in the case of the MEC project. The Court does not share  
Goodman’s understanding and assessment, which are not in line with the evidence.  
[
1042] Therefore, huge LLPs, as opined by Plaintiff’s experts, where required in relation  
to the YH Corporate loans in 1988.  
MEC  
Additional evidence specific to MEC  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
1043] At December 31, 1988, $83 million of loans made in connection to MEC were  
1085  
:
owed to Castor  
1
086  
- loan to YHDL/97872 as joint owners of MEC  
•
Loan 1100 - $ 46,109,129  
dated February 19, 1988, secured by second mortgage bond  
1
087  
;
1
088  
-
•
Loan 1109 - $ 4,000,000  
standby loan (credit reserve) made to  
YHDL/97872 as joint owners of MEC, dated February 19, 1988, secured by third  
mortgage1  
089  
;
1
085  
Vance - PW-2908,volume 2, chapter C, p.C-7 (figures taken from C&L’s working papers); Goodman -  
D-1312, p.143  
1086  
1087  
1088  
PW-1053-23, E151  
PW-1102A-3 and PW-1102A-7  
PW-1053-23 , E153  
500-05-001686-946  
PAGE: 222  
1
090  
- standby loans (fee and interest reserve) to  
•
Loans 1101/1103 - $ 3,848,106  
YHDL/97872 as joint owners of MEC, dated February 19, 1988, secured by third  
mortgage1  
091  
;
1
092  
- loan to YHDL, as one of the joint owners of MEC,  
•
•
Loan 1042 - $ 14,000,000  
1
093  
;
with an unregistered collateral mortgage on YHDL’s interest in the project  
1
094  
- loan to 612044, the parent company of 97872,  
Loan 1095 - $ 7,500,000  
secured by a pledge of all of the shares of 97872 (preferred and common);  
Loan 066/1146 – $0,8 million- loan to Palace II;1095  
•
•
Loan 701000/2001 - $ 7,550,000 - loan to Palace II secured by first mortgage on  
the Palace Theater.1  
096  
[
1044] There was also Loan 1158 made to the MEC Tenants Association, not related to  
YHDL, but secured by YHDL and 97872 guarantees.  
In t er es t s r ecogn ized a s r even u e  
[
1045] In 1988, Castor recognized interests totalling $8,501,253.02 as revenue on the  
1097  
.
MEC related loans  
Loa n d ocu m en t s a n d com m it m en t let t er s  
[
1046] The commitment letter of the second mortgage financing (loan 1100) specifically  
provided that 97872 and YHDL were each required to provide audited annual financial  
1
098  
statements as well as various other financial information regarding the project . The  
disbursement of such loan was conditional upon obtaining legal opinions as to the  
1
099  
validity of the security . Other commitment letters relating to MEC’s financing by CHL  
included similar covenants.  
[
1047] In respect of the equity loan to YHDL, loan 1042, the commitment letters and  
other legal documents called for annual financial statements of YHDL to be provided to  
1089  
1090  
1091  
1092  
1093  
1094  
1095  
1096  
1097  
1098  
1099  
PW-1102A-4  
PW-1053-23 , E155  
PW-1102-4  
PW-1053-23, E126  
PW-1063-4; PW-1063-5A  
PW-1053-23, E128  
PW-1110A  
PW-283; PW-1110A and PW-1110D  
PW-1105  
PW-1102A-3, pp.8-9  
PW-1102A-3, p.8  
500-05-001686-946  
PAGE: 223  
CHL within 120 days of YHDL’s fiscal year end, and for various financial information on  
1
100  
.
the Property (MEC), when requested by Castor (with inspection rights)  
1048] Legal documents relating to CHIF’s loan of $7,550 million secured by first  
[
mortgage loan to Palace II Development Inc. provided that Palace II Development Inc.  
1
101  
had to pay the interests monthly . Palace II Development Inc. also had to provide to  
CHIF annually, within 120 days of the end of its fiscal year, its audited year-end financial  
statements prepared in accordance with Canadian GAAP, and various other financial  
1
102  
information (with inspection rights) . YHDL and 612044 intervened in the deed. They  
were bound together and severally obliged to one another along with Palace II  
Development Inc. in favour of CHIF for the fulfillment of all the obligations of Palace II  
Development Inc.1  
103  
Bu d get , com p let ion d a t e a n d s t a t u s r ep or t s  
[
1049] As of February 19, 1988, the closing date of the financing, the estimated cost of  
completion of the project was $195 million and the completion date was to be no later  
than January 31, 19901  
104  
.
[
1050] Borrowers had to provide reports from the project monitor with each draw  
1105  
.
request  
Even t s t a k in g p la ce d u r in g 1 9 8 8  
[
1051] In January 1988, alleging that it had not received the comfort that they wanted  
1106  
from the due diligence investigation into the financial affairs of YHDL , because YHDL  
was too highly leveraged, the Bank of Montreal (“BMO”) required at least 10 million of  
additional equity up front to reduce its proposed first mortgage position of 135 million to  
1
25 million. The difference of 10 million was assumed by Castor.  
[
[
1052] The refinancing closing took place on February 19, 19881107  
.
1053] Shortly after the refinancing, in the fall of 1988, BMO issued a series of  
certificates notifying Castor of defaults under the first mortgage loan agreement. In each  
case, Castor was compelled to cure the default and make the payments that the owners  
failed to make1  
108  
.
1100  
1101  
1102  
1103  
1104  
1105  
1106  
1107  
1108  
PW-1063  
PW-285, PW-283B article 2(a) and PW-1110D  
PW-283B (see namely paragraph 31.10)  
PW-283B, pages 35-37  
PW-1102A-4.  
PW-1102A-4, pp.6-7  
PW-1102-A-2A  
See the series of exhibits PW-1102  
As examples, see PW-1104-1 and PW-1104-2; Ron Smith, September 15, 2008, pp.153 and  
following  
500-05-001686-946  
PAGE: 224  
[
1054] On December 8, 1988, BMO wrote that the physical completion of the MEC  
would not be achieved by January 31, 1990, thereby giving rise to an event of default,  
1
109  
.
and that the banks were actually in the process of assessing their position  
Substantial negotiations ensued and the issue was resolved, as long as the equity funds  
were put in place.  
[
1055] Because YHDL did not have other resources to remedy the deficiencies and to  
meet other requirements of the project, Castor always funded them on its behalf. YHDL  
was a fifty percent (50%) owner of the MEC project.  
[
1056] At the end of 1988, there were no outstanding loans made directly to 97872  
1110  
.
owed to Castor  
[
1057] Castor’s borrowers failed to meet their debt service obligations to Castor and to  
1111  
.
provide financial statements as called for in the loan agreements  
MEC a p p r a is a ls  
[
1058] Royal LePage carried an appraisal and submitted an appraisal report dated  
1112  
- they described their work and mandate and expressed their final  
August 5, 1988  
opinion as follows:  
•
•
We have carried out an appraisal and valuation analysis of the above-mentioned  
property and submit our findings.  
The purpose of this appraisal is to estimate the current market value of the  
subject property assuming it is fully occupied and completed in accordance with  
the plans and specifications provided to us.  
•
•
As a result of our investigations and analysis carried out, it is our opinion that the  
current market value of Phase 1, when completed at May 1st, 1989, is as follows:  
ONE HUNDRED THIRTY EIGHT MILLION DOLLARS ($138,000,000.) within a  
probable price selling range of between $133,000,000 and $143,000,000.  
The market value of both Phases 1 and 2 when completed, as at May 1st, 1990,  
is as follows: TWO HUNDRED AND SIXTY ONE MILLION DOLLARS  
($261,000,000.) within a probable price selling range of between $252,000,000  
and $270,000,000.  
[
1059] The figure that C&L relied upon – which is 275 million – comes from a Royal  
1113  
in which Royal LePage namely wrote:  
LePage report, also of August 5, 1988,  
1109  
1110  
1111  
1112  
PW-1104-3; Ron Smith, September 15, 2008, pp.158 and following  
PW-1101A; Ron Smith, September 15, 2008, p.160, 162  
PW-1054-3-1, p. 6.  
PW-1108  
500-05-001686-946  
PAGE: 225  
•
Further to your request, this is to provide you with a preliminary estimate of the  
market value of the proposed Montreal Eaton Centre assuming a proposed office  
building of approximately 400,000 sq.ft. is constructed above.  
•
The value estimates contained in this letter are preliminary in nature and are  
based upon assumptions which have not been substantiated by retail market  
studies in the downtown Montreal area.  
•
•
It is our understanding that the office component will be built over the Montreal  
Eaton Center retail complex and have direct internal linkages.  
We have recognized the favourable impact to the Montreal Eaton Centre retail  
component by the office building as an increase in gross sales for the retail  
tenants. In turn, the increase in retail sales will result in a greater amount of  
percentage rents being achieved and a correspondingly higher value.  
[
1060] Royal LePage stated that their value range upon completion was between 266  
million and 285 million, assuming that completion of an office tower would add more  
potential shoppers1  
114  
.
[
1061] As of December 31, 1988, the assumption on which Royal LePage’s additional  
report was based (scheme C - construction of an office building of approximately  
1
115  
.
4
00,000 sq.ft.) was held in abeyance  
Ot h er in for m a t ion  
[
1062] Between 1987 and 1990, loan 1042 served for YH year-end reallocation1116 as  
follows:  
•
•
•
As part of its 1987 YH year-end reallocation, Castor added 2 million to loan  
0421  
117  
1
.
1
118  
was added to loan 1042 as part of the 1988 YH year-end  
Nothing  
reallocation1  
119  
.
As part of its 1989 YH year-end reallocation, Castor added 10 million to loan  
120  
.
1
0421  
1
113  
PW-1108A; Ron Smith, September 15, 2008, pp. 207 and following; Ron Smith, September 22, 2008,  
p.79  
1
114  
115  
PW-1108  
1
D-99D; Vance, April 10, 2008, pp. 84-88; Vance, July 7, 2008, pp.234 and following; Ron Smith,  
September, 24, 2008. pp. 9 and following  
Ron Smith, September 15, 2008, pp.171-173  
PW-1056A  
1116  
1117  
1118  
1119  
Ron Smith, September 15, 2008, p.173  
PW-1056B  
500-05-001686-946 PAGE: 226  
•
As part of its 1990 YH year-end reallocation, Castor added 5 million to loan  
0421  
121  
.
1
[
1063] Ron Smith testified that those reallocations to loan 1042 were done without  
specific credit analysis:  
There was no credit analysis. York-Hannover maintained that they had fifty  
percent (50%) equity in the project and that the project was going to be worth,  
you know, in excess of three hundred (300) million dollars and therefore, they  
requested that we book it against directly.  
[
1064] The mortgage and loan ledger cards in Montreal clearly revealed that all interests  
and fees on the CHIF loan for Palace II Theater were being capitalized to a grid note in  
Montreal1  
122  
.
Exp er t s ’ evid en ce  
[
1065] Vance and Goodman took account of the MEC and the Palace II Theater loans  
under their proposed “MEC calculations” based on the market value at the date of  
projected completion, less estimated remaining costs to complete.  
[
1066] In all material respects, Vance and Goodman agree on the principal amount of  
loans and accrued interests owing to Castor in respect of the MEC project.  
1
123  
whereas  
[
1067] For 1988, Vance opined that there was a deficit of 11.1 million  
1
124  
Goodman opined that there was a surplus of 73.4 million . The following elements  
make up for the difference of 84.5 million:  
Description  
Amount - Difference  
32 million  
Market value at completion (MEC)  
Castor’s future interests as costs to  
complete  
20.7 million  
Projected operating income  
13.1 million  
8.1 million  
Market value (and indebtedness) – Palace  
II Theater  
Debt to others  
6.8 million  
1
120  
121  
122  
123  
124  
PW-1056C  
1
1
1
1
PW-1056D  
PW-167, vol.2: PW-283A-2  
Vance, PW-2908, volume 3, pp. 37-39  
Goodman, D-1312, pp.142-143 (MEC.11)  
500-05-001686-946  
PAGE: 227  
Contributions receivable from third parties  
2.4 million  
1.4 million  
Project payables  
TOTAL  
84.5 million  
[
1068] Vance used a value figure of 261 million, the suggested value in the Royal  
1125  
LePage appraisal PW-1108 dated August 5, 1988 . Goodman used a value figure of  
2
93 million that he derived from the following value indicators: 275 million, as per Royal  
LePage’s report PW-1108A that took account of additional value to be created by the  
office building to be erected, and 18 million attributed to the office pad component  
1
126  
itself . Goodman opined that since the costs to complete the office pad were included  
in the 108,076 million figure of costs to complete, value of the office pad had to be  
accounted for1  
127  
.
[
1069] In Vance’s calculations, the costs to complete are of 108,076 million. Goodman  
1128  
but he subtracted the future interests to be paid to  
started with the same figure,  
Castor (20.7 million). Goodman opined that “inclusion of future income was not  
prevailing GAAP practice at the time in lending institutions” and that it was “not Castor's  
established practice at the time and it represents, recording of future losses that have  
not been incurred”1  
129  
.
[
1070] Goodman opined that it was necessary to take account of the contributions of  
others that would serve to pay some of the costs to complete, since those costs were  
1
130  
deducted from value . Goodman also opined that the operating income (13.1 million)  
had to be deducted because it would reduce Castor’s funding toward the costs to  
1
131  
complete . Vance opined that while these amounts would create equity, they should  
not be deducted in the calculation, since they had already been taken account of in the  
value opinion1  
132  
.
[
1071] For the Palace II Theater, Vance used a figure of 4.173 million1133 while  
Goodman used one of 11 million.  
1125  
1126  
1127  
1128  
1129  
1130  
1131  
1132  
1133  
PW-1108  
D-1312, p.157 – as per the offer made D-943  
Goodman, September 23, 2009, p.131  
D-1312, p.134 (MEC.6)  
Goodman, September 23, 2009, pp.123-124  
Goodman, September 23, 2009, pp. 82-85, p.133  
Goodman, September 23, 2009, pp. 82-85, p. 133  
Vance, April 13, 2010, pp.234-238; Vance April 15, 2010, pp. 86-91; Vance, May 4, 2010, pp.212-216  
PW-1137-2, Schedule 1; PW-2908, volume 3 (MEC), p.39  
500-05-001686-946  
PAGE: 228  
[
1072] When Goodman subtracted the project’s payables, he excluded all future  
1134  
.
interests to Castor  
1135  
1073] Vance subtracted 6.8 million of debts payable to others (creditors of 97872  
1136  
[
and 612044 ). Goodman opined that these debts should not have been subtracted.  
1137  
[
1074] Froese did not opine on MEC for 1988 . In his 1997 report, based on a  
methodology and an analysis that he considered appropriate, and that he believed  
reflected a reasonable opinion, he had shown a surplus between 20.4 million and 39.4  
1
138  
million on the MEC project at the end of 1988 . Since 1997, no new documents came  
to his attention other than the Bedard appraisal on the Palace II Theatre (which shows a  
1
139  
higher value than the book value previously available to him) . However, in his report  
PW-2941, Froese’s calculations on MEC do not include Palace II Theater – Palace II  
Theater has been looked at separately.  
[
1075] Rosen’s value range for MEC was between 266 and 285 million, but he did not  
1140  
.
add value for the office pad component, and he used 11 million for Palace II Theater  
[
1076] In his written report, further to a calculation methodology based on the  
percentage of completion, Rosen suggested a minimum loan loss provision of 3 million.  
1
141  
In testimony , Rosen agreed that it would have been acceptable not to record a LLP  
1
142  
for  
on Castor’s loans to MEC in 1988 - based on Rosen’s corrected calculation  
1
143  
.
Approach A resulting largely from his discovery of the Bédard appraisal  
Conclusions  
[
1077] Without agreeing to any specific components found in the opinions of Froese,  
Rosen and Goodman on the MEC 1988 situation, the conclusion that it would have  
been acceptable not to record a LLP on Castor’s loans to MEC is the Court’s  
conclusion.  
[
1078] Therefore, no use going into many more particulars, save to explain two of the  
reasons why Goodman’s proposition that there would have been a surplus of 73.4  
million available as at December 31, 1988 is rejected.  
1134  
1135  
1136  
1137  
1138  
1139  
1140  
1141  
1142  
1143  
Goodman, September 23, 2009, pp.87-88  
PW-323  
PW-326  
PW-2941, volume 3 (MEC section), pp.166 and following  
D-1079  
Froese, January 9, 2009, pp.48-53  
PW-3033-3  
Rosen, April 7, 2009, pp.186 and following  
PW-3033-3  
D-586  
500-05-001686-946  
PAGE: 229  
•
It would not be appropriate to use a total market value of 293 million, as  
Goodman did, since the increase value could only result from the actual  
construction of the office tower and since Royal LePage’s comments in PW-  
1
108A are of a “preliminary” nature. At best, the market value figure could be 279  
million - 261 million as per Royal LePage’s appraisal PW-1108 plus 18 million as  
per the December 22, 1988 offer relating to the pad component, assuming no  
1
144  
and costs to complete  
.
value was attributed to the pad component in PW-1108  
1
145  
the pad were part of the costs to complete to be deducted  
•
Future interests to Castor should not have been deducted from the costs to  
1146  
namely because neither the borrowers of Castor, nor Castor itself  
complete  
(
was Castor to take possession of the property and finalize the construction) had  
the means and the capacity to pursue the project, without incurring that kind of  
costs as part of the costs to complete.  
TSH  
Additional evidence specific to TSH  
Ben eficia l own er s h ip  
[1079] The shares of Lambert were issued to bearer.  
[
1080] Baudet, the president of Lambert, thought Wersebe was the ultimate owner of  
Lambert but he acknowledged that Stolzenberg gave him instructions and was an  
authorized bank signatory.1  
147  
1
148  
believed that the ownership of the TSH resided  
[
1081] Neither Prychidny nor Whiting  
with the YH group. Prychidny testified that: «we had no other owner to look to other than  
Castor Holdings knowing that Mr. Gravenor was a nominee and not a beneficial owner,  
so we would look to Castor to act as the owner's representative and support the  
1
149  
property in that way.»  
[
1082] In letters dated September 14 and September 16, 1988 relating to negotiations to  
sell the hotels owned or managed by YHHL, including the TSH, Prychidny wrote:  
We have had the opportunity to canvas the various owners involved in the  
transaction in order to provide a counter-proposal acceptable to our principals1  
150  
.
1144  
1145  
1146  
1147  
1148  
1149  
1150  
D-943; Vance, May 4, 2010, pp. 214-215  
D-99D (108,076 million)  
Vance, April 14, 2008, p.10  
Baudet, April 28, 1999, pp. 51, 61, 66; April 30, 1999, pp. 83-84.  
Whiting, November 18, 1999, p. 90.  
Prychidny, October 15, 2008, p. 121.  
D-1035  
500-05-001686-946  
PAGE: 230  
On behalf of our clients, York-Hannover Hotels Ltd. agrees to pay (…) since  
some of the owners are involved in the London market, and the properties are  
not listed for sale, it may be very embarrassing to have you discuss a sale with a  
party our owners may be doing business with (…) The owners do not want the  
1151  
properties “shopped”  
(our emphasis)  
[
1083] Smith never saw a financial statement of Lambert and all his instructions with  
1152  
respect to this borrower came from Stolzenberg.  
[
1084] All instructions for the Lambert share subscription as well as the financing were  
1153  
provided to the lawyers by Castor.  
[
1085] Similarly, all instructions for Gravenor, a lawyer who was the nominee President  
and Director of both Topven and 594369 were provided by Castor, and Gravenor was  
1
154  
.
indemnified by Castor for assuming these functions  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
1086] At December 31, 1988, 111 million of loans made in connection to TSH were  
owed to Castor (CHL and CHIF).  
Owed to CHL  
•
•
Loan 1107 to Topven 88 secured by first mortgage - 40 million1155  
Loan GL/AC 66 (loan 1148) - operating line to Topven (or Topven 88),  
1
156  
grid note to Topven - 7.6 million  
Owed to CHIF  
•
•
Loan 888002/2003 to Topven 88 secured by second mortgage – 20  
million1  
157  
Loan 576000/3002 to Lambert secured by a pledge of shares - 35.7  
million1  
158  
1151  
1152  
1153  
1154  
1155  
1156  
1157  
1158  
PW-2928  
R. Smith, June 11, 2008, pp. 177–178, 184-185.  
R. Smith, September 3, 2008, p. 14.  
PW-234, PW-235, PW-236 and PW-236A  
PW-212-1; PW-211; PW-1053-23-9; PW-1053-23,E-80  
PW-1053-23-9; PW-167  
PW-211-1; PW-1460-8; PW-1460-7; PW-1053- , B-39 and B-40  
PW-1053-91, B-36  
500-05-001686-946  
PAGE: 231  
•
Loan 576001/3009 to Lambert secured by a pledge of shares - 7.7  
million1  
159  
In t er es t s r ecogn ized a s r even u e by Ca s t or in 1 9 8 8 on loa n s r ela t in g t o TSH  
[
1087] $4,791,632.35 of capitalized interests on CHL’s loans 1107, 066/1148 and  
1160  
.
CHIF’s loan 8880021/2003 were recognized as revenue in 1988  
Loa n s a n d com m it m en t let t er s  
[
1088] Loan documents with Castor required the provision of annual financial  
statements according to GAAP, prepared by a CA, and the payment of interests in cash  
on a monthly basis.1 These covenants were not respected.  
161  
Pr ior t o 1 9 8 8  
[
1089] CHIF funded the purchase of Topven’s shares by Lambert, as Lambert itself had  
1162  
Ron Smith was involved in the setting-up of the required loans to  
no resources.  
Lambert in 1984 and 1985, and he testified that there was no credit analysis made by  
Castor prior to making the loans to Lambert.  
«
I did not do any analysis of it and nobody else, in my mortgage investment  
1163  
group, did either».  
[
1090] By the end of 1985, Castor’s exposure on the TSH project was approximately  
73 million.1  
164  
$
[
1091] Topven incurred net losses of $3,425,000 in 19841165, of $7,111,000 in 19851166  
1167  
.
and of $9,857,000 in 1986  
[
1092] The auditors of Topven (Peat Marwick) refused to issue its 1985 audited financial  
statements without having first received confirmation from Lambert that it would provide  
1
168  
sufficient funds to meet its operating obligations and other financial engagements.  
1
1
1
159  
160  
161  
PW-1053-91, B-37  
PW-1081A  
First mortgage loan (#1107): PW-212-1; Second mortgage loan (#888,002/20): PW-2273; Grid note  
loan (#1148): PW-275C; Lambert Securities loans (#576,000/30 and 576,001/30): PW-136A and PW-  
2759.  
1162  
1163  
1164  
1165  
1166  
1167  
1168  
R. Smith, September 3, 2008, p. 13.  
R. Smith, June 11, 2008, p. 177.  
R. Smith, June 11, 2008, pp. 166-169.  
PW-404  
PW-405  
PW-187  
PW-1080-3; R. Smith, September 3, 2008, pp. 52-53.  
500-05-001686-946 PAGE: 232  
[
1093] Despite promised support from Lambert, the auditors continued over the next  
year to be concerned about the collectability of a receivable, of $586,000 from YH, and  
about the deteriorating performance of the TSH. Peat Marwick also came to the  
conclusion that there were undisclosed related party transactions between Castor,  
YHHL and Topven. Those matters could not be resolved sufficiently to satisfy Peat  
Marwick’s concerns and the 1986 financial statements were issued with serious  
qualifications.1  
169  
Our audit opinion contains two qualifications related to departures from generally  
accepted accounting principles evidenced firstly by the Company's failure to  
appropriately provide for the doubtful collection of its receivable from York-  
Hannover Hotels Ltd. and secondly for the difference of opinion between  
management and ourselves as to what constitutes a related party transaction  
under generally accepted accounting principles1  
170  
.
[
1094] The Topven 1986 financial statements also contained a “going concern” note  
expressing uncertainty as to the ability of the company to realize its assets and to  
discharge its liabilities in the normal course of business as a going concern.  
[
[
1095] Topven’s auditors asked that they not be reappointed as auditors.1171  
1096] On June 13, 1986, Smith wrote to Stolzenberg that he had serious issues with  
YHHL’s management of the TSH and with Castor’s loans to borrowers connected to the  
TSH- he said:  
“
It is imperative that we meet with KVW concerning the following issues. The  
meeting is long overdue and most of the items have reached the critical stage.  
We have bank-rolled these hotel projects and kept them alive for the past years  
by a combined investment of $100 million from the lenders and equity syndicates  
with the result that the projects are still seriously floundering and require  
substantial additional sums of money with no end in sight. York-Hannover Hotels  
have made no progress on either project. They have provided us with very  
limited cooperation and information based on instructions from KVW and the  
hotel personnel are operating without leadership, direction, enthusiasm or  
commitment…  
It is now very critical that alternate solutions be discussed, strategies selected,  
and the appropriate people selected and delegated the authority to implement  
1172  
the strategic objectives.  
”
1
1
1
169  
170  
171  
PW-411; R. Smith, September 3, 2008, pp. 79-81.  
PW-188, p. 2  
PW-188; PW-187: Audited financial statements of Topven Holdings for the year ended December 31,  
1
986; R. Smith, September 3, 2008, pp. 85–89.  
1172  
PW-1080-2  
500-05-001686-946  
PAGE: 233  
[
1097] In this same memorandum, Smith described as follows his concerns relating to  
the TSH:  
“
Various lenders in the syndicate have requested the 1985 audited statements  
and a progress report on the hotel, as required under the terms and conditions of  
the Loan and Co-Lenders Agreement. To date we have provided vague verbal  
responses which have kept them at bay, however, they keep repeating their  
requests and they will not let the matter go unanswered much longer. The lack of  
financial statements and progress report will become a bigger issue and receive  
more scrutiny the longer it takes to deliver them.  
We have been informed that the auditors will not release the 1985 financial  
statements until they have –  
a) Reviewed and satisfied themselves with the feasibility of the Topven  
Skyline Business Plan for 1986. They are quite concerned that the hotel  
has not performed anywhere near the previous forecasts, and that the  
real problem lies with the managerial capacity and competence of York-  
Hannover Hotels which may not be corrected in time for the hotel to  
survive.  
b) Received a commitment from Lambert to Topven to fund the 1986  
anticipated deficiency of approximately $5 million via a preferred share  
issue or otherwise. This will require a substantial commitment from  
Lambert which may not end at this point and will be repeated in 1987  
although hopefully on a smaller scale.  
The auditors are starting to get quite skiddish [skittish] on both hotel projects  
because of the poor performance of the properties and management, the high  
leverage, the cash deficiencies and the perceived insolvency of the situations.  
They are getting quite worried about their own liability and questioning everything  
according to the rules. They are even starting to question the ownership and  
cash support of the project by offshore share subscriptions and deposits and  
Castor’s involvement as a lender1 ”.  
173  
[
1098] Concern over the exposure of Castor on loans to Lambert was expressed by  
1
174  
he attempted to assess the  
Jean-Guy Martin in the 1986 working paper file of CHIF:  
value of the underlying security and was unable to do so1175.  
[
1099] In the 1986 working papers, Martin noted that interests had been capitalized  
1176  
100%) on the Lambert loans since inception.  
(
1173  
1174  
1175  
1176  
PW-1080-2  
PW-1053-95-1  
Jean Guy Martin, January 5, 2010 pp. 137-161  
Jean Guy Martin, January 5, 2010, p. 160  
500-05-001686-946  
PAGE: 234  
[
1100] Martin, moreover, noted the reluctance of Stolzenberg to provide him with  
information regarding to Lambert and suggested delaying the release of Castor’s  
1
177  
financial statements until more information was obtained. His notes on the MAPs  
included the following:  
1
1. CHI-N.V. has approximately $42 million in loan receivables (Lambert  
Securities Inc.) for which the security could not be obtained in Zug. WOST was  
apprised of the situation and appeared very reluctant to disclose the information  
we need. Interest on this loan has been capitalized since the loan was made in  
1
1
984 for a total of $8,500,000 of which $2,833,820 was received on January 28,  
987. The loan is secured by the following assets for which we could not  
ascertain the value (no documents available to us):  
i) 600 shares of Lambert Securities Inc. - Panama;  
ii) 15,679,315 Class B shares (non-voting) of Topven Holdings Inc.  
representing an amount of $15,679,315. This company owns and  
operates the Skyline Hotel in Toronto);  
iii) subordinated note receivable from Topven Holdings Ltd.(non-interest  
bearing) in the amount of $2,239,000;  
iv) note receivable from Skyeboat Investments Ltd. in the amount of  
$
7,099,000;  
v) 11 common shares of 594639 Ontario Ltd.  
We strongly suggest that C&L Montreal (ECW/JG) obtain this information in order  
to determine the adequacy of the security before releasing financial statements in  
1178  
final form.  
”
[
1101] Further to those remarks, no financial statements of Lambert were obtained but  
C&L nevertheless released its 1986 audited financial statements.  
[
1102] Despite financing from Castor to refurbish the hotel, by 1987, the TSH was still  
1179  
unable to achieve the net operating income that YH had projected.  
[
1103] The loans had been made and renewed since the early 80s without any credit  
review of the borrower.  
[
1104] Although the TSH was an operating property and should have been able to  
1180  
and on the  
service its debts, interests were being capitalized on the Topven loans  
1
181  
.
Lambert loans, at least as early as 1984  
1177  
1178  
1179  
1180  
PW-1053-3-1  
PW-1053-3-1  
PW-1080-2 and PW-409  
PW-1081A.  
500-05-001686-946  
PAGE: 235  
[
1105] In October 1987, solicitors for the City of Etobicoke notified TSH’s management  
that legal action would commence on December 1, 1987, unless outstanding realty and  
business taxes of 5.3 million were paid, or acceptable payment terms were agreed  
1
182  
upon . Of that 5.3 million, the City of Etobicoke requested an immediate payment of  
approximately $2.35 million that represented business taxes and 1985 realty taxes.  
Even t s t a k in g p la ce d u r in g 1 9 8 8  
[
[
1106] By 1988, Castor had imposed controls over the TSH’s bank accounts.  
1107] A 1987 Restated Operating Results for Topven, provided by Castor to C&L on  
February 24, 1988 for the 1987 audit, disclosed income before debt and depreciation of  
2
.9 million, and the following information regarding Castor’s understanding of TSH’s  
market value as of that date:  
“
The appraisal used for financing purposes confirmed the value of $66 million for  
the hotel complex, which together with the extra development lands of  
approximately 15 acres (@ $800,000/acre = $12 million approximately) indicates  
a minimum value of $78 million for the property”.1  
183  
[
1108] At the time of restructuring, Topven’s financial statements disclosed an  
1
184  
accumulated deficit of approximately 30 million . The restructuring transferred the  
Toronto Skyline property and operations into a new company with no deficit.  
[
1109] The corporate restructuring of the project in 1988 was part of a final refinancing  
1185  
This refinancing had the effect of increasing Castor’s loan exposure  
of the TSH.  
from 75 million (in 1987) to 111 million (in 1988).  
[
1110] Documents related to the first and second mortgages did not provide that all  
property taxes were current but only that “In the event any amounts are owing, they  
1
186  
Also, the loans did not require the  
shall be paid on a basis acceptable to the Lender.”  
borrower to provide Castor with audited financial statements but only with financial  
1
187  
statements prepared according to GAAP by a chartered accountant . Both minimal  
requirements were less onerous than prior loan covenants.  
1181  
1182  
1183  
1184  
1185  
1186  
1187  
PW-1053-3, seq. p. 477.  
PW-415  
D-138  
PW-431  
PW-420.  
PW-212-1, pages 3(2) and 4(1).  
PW-212-46, page 10, 7.1(e), (j) and (i).; PW-211-2, page 4(j) and (n).  
500-05-001686-946  
PAGE: 236  
1188  
1111] At the time of refinancing, property taxes of 3 million (including penalties)  
[
were in arrears for 1986 and 1987 and 1.3 million of 1988 property taxes remained  
outstanding. The Hotel cash flow was substantially less than that projected as at the  
date the loans were initially funded. The refinancing included arrangements with the City  
of Etobicoke to pay all 1986 and 1987 tax arrears by December 31, 1988.  
[
1112] The security on the 40 million loan included a mortgage on the land, buildings,  
furniture, fixtures and equipment of the Toronto Skyline, an assignment of revenues,  
leases and rents of the property, an assignment of the hotel management agreement, a  
guarantee of Topven (1988), and a pledge of issued and outstanding shares of  
Topven1  
189  
.
[
1113] The security on the $20 million loan included a second mortgage on the Toronto  
Skyline property and the same assignments, guarantees and pledges as the $40 million  
loan1  
190  
.
[
1114] The residual debt of $3.9 million was put into a grid note (loan 1148 to Topven),  
which grew over the years pursuant to capitalized interests on the grid note loan, the  
first and second mortgage loans to Topven (1988), as well as Castor’s financing of the  
1
191  
operating expenses of the TSH.  
[
1115] A balance sheet of 5943639 Ontario Ltd. as at August 31, 1988 showed that  
1192  
.
there was no value to the shares of 594369 Ontario Ltd  
[
1116] Interests on the $40 million first mortgage, the $20 million second mortgage and  
1193  
.
the $5 million grid note were all capitalized to the grid note  
[
1117] YH had not and did not put any money into the TSH - it was only Castor which  
1194  
funded the operating shortfalls of the hotel, including payroll and property taxes.  
Even when the possibility of losing the hotel was tangible, Wersebe did not and would  
1
195  
.
not provide any financial assistance  
[
1118] Negotiations were entered into by YHHL to try to sell at once the hotels that they  
owned or managed, but nothing materialized.  
1
1
1
1
1
1
1
188  
189  
190  
191  
192  
193  
194  
PW-211-26  
PW-212-46, page 9.  
PW-211-2, page 1.  
R. Smith, June 11, 2008 at pp. 172 -173; PW-167D. PW-276  
PW-1460-4  
PW-1460-5  
R. Smith, September 3, 2008, pp. 49 – 51, 55 – 56; PW-418; PW-1080-7; PW-1080-9; See also PW-  
414.  
1195  
Prychidny, October 14, 2008, pp. 47–49.  
500-05-001686-946  
PAGE: 237  
•
•
•
On August 18, 1988, an initial offer was made to YHHL to purchase the hotels  
(
MLV, TSH, CSH, OSH and Triumph) for 190 million.1196  
YHHL prepared a property summary of hotels that were being considered for  
sale.1  
197  
1
198  
were ignored  
Subsequent counter-offers made by YHHL for higher amounts  
and the 190 million initial price was again proposed by the potential purchaser,  
1
199  
subject to due diligence.  
•
•
•
By November 1988, it was evident that a higher price was not obtainable and the  
1
200  
offer of 190 million was insufficient from the perspectives of YH and Castor.  
Other initiatives by YHHL to try to attract investors were recognized as unrealistic  
and were not pursued.1  
201  
A variety of scenarios were drafted by YHHL with different values ascribed to the  
management contracts. However, Prychidny explained that the management  
1203  
and that these values were merely a “plug”.  
1
202  
contracts were “worthless”  
[
1119] The income pre-debt fell far short of the projected budgets and was insufficient to  
1204  
service the annual interest obligations : the TSH recorded less than $2 million of pre-  
debt income but had an annual interest obligation of more than $15 million.  
[
1120] The mortgage and loan ledger cards indicated, in addition to the capitalized  
interest on the loans, that Castor was paying the fees and the operating expenses of the  
borrower.1  
205  
[
1121] On October 28, 1988 Castor instructed YHHL that, due to the refinancing, an  
audit of Topven would no longer be required for either 1987 or 1988, and the firm of  
O’Hagen & Scarrow would be used to prepare Notice to Reader’s statements (not  
1
206  
.
audited or reviewed) for Topven (1988)  
1
1
1
1
1
1
1
1
1
196  
197  
198  
199  
200  
201  
202  
203  
204  
PW-499. See also PW-499E.  
D-140  
PW-499A; Prychidny, November 4, 2008, pp. 214-220.  
PW-499D; Prychidny, November 4, 2008, pp. 214-220.  
PW-499B; Prychidny, November 4, 2008, pp. 214-220.  
PW-499F; R. Smith, September 23, 2008, pp. 14-15.  
Prychidny, November, 10, 2008, pp. 79 – 82.  
Prychidny, November 4, 2008, pp. 133 – 134.  
PW-1084A and PW-424, bates p. 9; shows income pre-debt of $1.8M and a loss for the year of $9M  
(
this is a preliminary report but the figures are confirmed in PW-429, the 1989 statement with  
comparative figures for 1988)  
PW-167D.  
1205  
206  
1
PW-428, paragraph 2.  
500-05-001686-946  
PAGE: 238  
[
1122] In 1988, TSH generated only 1.8 million of cash flow before interests and  
1207  
and the total accumulated deficit of its owners (Topven, Topven (88)  
depreciation,  
1
208  
.
and Lambert) as of December 31, 1988, was 54.7 million  
[
1123] Lambert paid interests in early 1989 and TSH could not have been the source of  
these funds: therefore, the funds must have come from another source. Although the  
evidence does not establish this other source for such payment of interests, it shows  
that cash circles of Castor’s funds were the device used to pay interests on Lambert’s  
loans thereafter1  
209  
.
TSH a p p r a is a ls  
1210  
1124] Appraisals or market value estimates of the TSH were prepared in 1988 . The  
[
assumptions were provided by Prychidny, including the planned operational strategy  
and the assumption that 12 million worth of renovations would be completed within one  
year.1  
211  
[
1125] An appraisal prepared by Pannell, Kerr, Forster in relation to the Toronto Skyline,  
1212  
dated January 15, 1988 , provided an estimate of value between 56.2 and 62 million,  
without considering the value of the development land, estimated by Walter Prychidny  
at 8 to 10 million1  
213  
.
1214  
[
1126] A Gillis appraisal , dated April 15, 1988 and signed by Mullins, appraised the  
TSH at a value of 93 million and included land and improvements, all the furniture,  
fixtures, equipment, licenses, contracts, leasehold interests, and goodwill. It attributed a  
value of 10 million to surplus land.  
[
1127] The Gillis appraisal assumed, among other matters, a net operating income of  
7
.4 million to 9.7 million for each of the five years subsequent to April 1988, an  
assumption well in excess of the income before interests and depreciation of 1.2 million  
that was realized in 1987 not to mention the net losses of approximately 9 million that  
were incurred during both years 1987 and 1988.  
[
1128] The Gillis appraisal included specific reference and comments on the  
Constellation Hotel:  
1207  
1208  
1209  
1210  
1211  
1212  
1213  
1214  
Froese, PW-2941, vol. 2, p.45, paragraph 2.92  
Froese, PW-2941, vol. 2, p.46, paragraph 2.95  
Froese, January 27, 2009,pp. 66 and following; Levi, January 14, 2010, pp.81 and following  
PW-421; PW-422; PW-423  
Prychidny, October 17, 2008, pp. 149-150.  
PW-421  
PW-422  
PW-425  
500-05-001686-946  
PAGE: 239  
“
Currently, the Constellation Hotel, located on Dixon Road airport corridor, just  
west of the subject property, is on the market for $116,500,000.00 including  
surplus land having an estimated market value of $7,500,000.00.  
The offering data was prepared by the management firm of Laventhol & Horvath,  
and includes a pro-forma maintainable income estimate for the hotel complex of  
$
10,943,000.00 before financing depreciation and income taxes…  
The Constellation Hotel is considered to be comparable to the subject in location,  
site area (15.75 acres), total number of rooms (854), restaurant, convention and  
recreational amenities. It has a multi-level car park with a capacity of 1,300 cars  
plus surface parking on the surplus land.  
The Constellation Hotel is also similar to the subject in its historical  
development…  
The Constellation lacks the subject’s superior amenities provided by the  
commercial mall tenants, but is considered to be superior in location, age and  
overall appearance.  
While the foregoing is only an offering, it is believed to reasonably reflect an  
overall capitalization rate for a large full service convention type hotel, within the  
airport market.”  
Ot h er in for m a t ion  
[
1129] Castor treated TSH as unique and distinct from the YH loans and acted in an  
owner-like manner. For example:  
•
•
The interests on the TSH loans were never accrued in account 046, which  
account was only used for YH direct loans or project loans;1215  
Stolzenberg was responsible for the appointment of the director and officer of the  
owner entities, and Castor provided them with an indemnification agreement.  
[
1130] Defendants’ expert Morrison testified that «it was generally known that it (TSH)  
1216  
was not a good project», that «it was a real dog.»  
[
1131] C&L recorded a management representation to the effect that the Constellation  
Hotel located near to the TSH had been sold for approximately $115 million.  
Exp er t s ’ evid en ce  
1
215  
216  
R. Smith, September 18, 2008, pp. 19–20.  
Morrison, October 5, 2006, p, 141.  
1
500-05-001686-946  
PAGE: 240  
[
1132] Plaintiff’s experts concluded that the audited consolidated financial statements  
with respect to the carrying value of Castor’s loans connected to the TSH project were  
materially misstated.  
•
•
•
Vance opined that the minimum LLP should be $20.4 million1217  
;
Rosen opined that the minimum LLP should be 21.9 million1218  
Froese opined that the minimum LLP should be 24.4 million1219  
;
.
[
1133] Plaintiff’s experts also concluded that the loans should have been placed on a  
1220  
and capitalized interests and fees should have thus been  
non-accrual basis  
reversed.  
[
1134] Goodman severed his analysis of Lambert from the other TSH related loans,  
although he clearly understood that the TSH was owned by Lambert.  
[
1135] Goodman asserted GAAP did not permit him to assess the loss on the Lambert  
loans. He considered eight elements «in determining whether it was probable that  
1
221  
Castor would incur a loss on its loans to Lambert» , in order to support his conclusion  
of no reliable evidence of any such loss as at December 31, 1988 with respect to  
Lambert.  
[
1136] Before taking account of the Lambert loans, all experts came to similar surplus  
figures:  
Expert  
Vance  
Surplus  
23 million  
19 million  
25.4 million  
24.9 million  
Froese  
Rosen  
Goodman  
[
1137] Goodman’s surplus figure could not cover the Lambert loans. Had Goodman  
taken account of the Lambert loans, as Plaintiff’s experts did, Goodman would have  
come to a minimum deficiency figure of 22.3 million.  
1217  
1218  
1219  
1220  
1221  
Vance, April 8, 2008, pp. 100-103; PW-2908  
PW-3033; Rosen, April 7, 2009;  
Froese, January 27, 2009, pp. 95 and following and PW-2941-4, Schedule 1  
PW-2941, Vol. 2, p. 4; PW-2908, Vol. 1, p. 4-I-18 to 4-I-19; PW-3033, Vol. 2, Appendix A, p. 6.  
D-1312, pp. 496–499  
500-05-001686-946  
PAGE: 241  
Conclusions  
[
1138] Evidence with respect to the beneficial ownership of the TSH is equivocal, but  
given the facts as they unfold during the relevant years (1988-1990), the Lambert loans  
cannot be assessed as part of the YH group of loans.  
[
1139] Ford’s testimony that she would have seen financial statements of Lambert that  
showed that Lambert held marketable securities is neither credible nor reliable. The only  
source of funds available to Lambert to repay its loans was the value of the TSH.  
[
1140] At best, the market value of the TSH was 93 million: TSH did not perform  
financially at profitability levels that were even close to the projections included in the  
appraisal of Gillis Associates Real Estate Appraisers Limited dated April 15, 1988 –  
therefore, the assumptions underlying the Gillis valuation might be unreasonable.  
[
1141] Taking account of this best scenario as to market value, and the various figures  
proposed by all experts, Castor should have recorded a LLP of at least 18 million for its  
loans related to TSH.  
CSH  
Additional evidence specific to CSH  
Ben eficia l Own er s h ip  
[
1142] Skyeboat and 321351 held, between them, the shares of Skyview Hotels Ltd.,  
which owned CSH.  
[
1143] No share certificates or minute books were located to determine the beneficial  
ownership of the CSH.  
[
1144] Evidence with respect to the beneficial ownership of the CSH after 1985 is  
equivocal, although Granton Patrick, a lawyer, asserted that he was «the legal and  
beneficial owner of the company which owns the hotel», i.e., 321351. As well, Gravenor  
&
Keenan, a law firm, held an option over Patrick's position, with the option extending  
1222  
for 20 years.  
[
1145] Whiting stated that CSH was not part of the ownership chain of the YH group of  
1223 1224  
(which  
companies . He referred to the hotels listed in Prychidny’s schedule  
included the CSH) as the “hotel properties that were within the York-Hannover Hotels  
sphere of influence”1  
225  
.
1222  
1223  
1224  
1225  
PW-226  
Whiting, November 18, 1999, pp.90-91  
PW-499C-1  
Whiting, February 14, 2000,p. 15  
500-05-001686-946  
PAGE: 242  
[
1146] Ron Smith testified that:  
•
he received his instructions from Wersebe for the acquisition by 321351 of the  
leasehold interests from the Four Seasons Hotel, and for the completion of this  
acquisition1  
226  
;
•
•
321351 was a company taken off the shelf just to hold the leasehold interests – it  
had no other assets1  
227  
;
the shares of 321351 were held in trust by Granton Patrick, a lawyer representing  
1
228  
;
YH and Castor, upon the instructions of Wersebe and Stolzenberg  
Granton Patrick had no economic interest – he was just a nominee1229  
•
•
;
at Stolzenberg’s insistence, the shares of Skyeboat were transferred over to  
Lakeland and Gravenor Keenan, Castor’s law firm, was given an option to buy  
1
230  
;
back the Granton Patrick interest, in 321351  
•
•
Four Seasons wanted a guarantee; it was not prepared to accept a YH  
1231  
;
guarantee; it wanted Castor’s guarantee  
In 1986, Millican became a director and nominee of Skyeboat and Lakeland,  
1
232  
and thereafter, also of  
further to instructions received from Stolzenberg,  
Skyview1  
233  
;
•
All approvals came from Stolzenberg1234  
.
[
1147] Prychidny testified that he did not know who the owner of the CSH was but that  
each time he needed instructions, from a management point of view, he turned to  
Castor1  
235  
.
[
1148] In letters dated September 14 and September 16, 1988 relating to negotiations to  
sell the hotels owned or managed by YHHL, including the CSH, Prychidny wrote:  
We have had the opportunity to canvas the various owners involved in the  
transaction in order to provide a counter-proposal acceptable to our principals1  
236  
.
1226  
1227  
1228  
1229  
1230  
1231  
1232  
1233  
1234  
1235  
Ron Smith, September 5, 2008, pp.84-85  
Ron Smith, September 5, 2008, p.87  
Ron Smith, September 5, 2008, pp.85-86, 91-92  
Ron Smith, September 5, 2008, p.88  
Ron Smith, September 5, 2008, pp. 86,87, 91-92, 97 and PW-1086A  
Ron Smith, September 5, 2008, pp.86-87  
Ron Smith, September 5, 2008, p.100 ; see also PW-1086-4  
Ron Smith, September 5, 2008, p.110; see also PW-1463-10  
Ron Smith, September 5, 2008, pp. 97-98-99,110-111  
Prychidny, October 15, 2008, pp.174-175  
500-05-001686-946  
PAGE: 243  
On behalf of our clients, York-Hannover Hotels Ltd. agrees to pay (…) since  
some of the owners are involved in the London market, and the properties are  
not listed for sale, it may be very embarrassing to have you discuss a sale with a  
party our owners may be doing business with (…) The owners do not want the  
1237  
properties “shopped”  
(our emphasis)  
[
1149] The financial statements of Skyeboat Investments Ltd.1238 signed by Doane  
Raymond Pannell include the following inscription: “Note payable to affiliated company  
Castor”.  
[
1150] The Balance Sheet of 321351, part of a Notice to Reader prepared by Doane  
Raymond Pannell, includes the following inscription:” Due to affiliated companies,  
Skyeboat, Skyview, Castor”1  
239  
.
Pr ior t o 1 9 8 8  
[
1151] Although the CSH was the best hotel managed by YHHL,1240 it was already in  
financial difficulties by 1985. Its income from operations was insufficient to meet its  
1
241  
and it was struggling with various  
obligations under the loan agreements,  
1
242  
management weaknesses such as the inability to finalize its business plan.  
Concerns about the solvency of the owner of the freehold interest were expressed by  
Skyeboat’s auditors who refused to issue the 1985 financial statements without having  
received confirmation that sufficient funds would be provided to meet obligations.  
[
1152] The CSH was much less competitive in the marketplace and by 1986, Castor  
acknowledged:  
«
We have bank-rolled these hotel projects [TSH and CSH] and kept them alive  
for the past 3 years […] with the result that the projects are still seriously  
floundering and require substantial additional sums of money with no end in  
1243  
sight.»  
[
1153] Between 1985 and 1987, CSH experienced chronic cash shortages and turned  
1244 1245  
including rent, payroll and taxes. No financial  
to Castor to fund operating costs,  
assistance for the CSH came from YHHL or Wersebe, although they were well aware of  
the hotel’s financial situation and its need for cash, «but none was ever forthcoming […]  
from the York-Hannover group. » The only financial support that the hotel could count  
1236  
1237  
1238  
1239  
1240  
1241  
1242  
1243  
1244  
1245  
D-1035  
PW-2928  
PW-466C  
PW-465B  
Prychidny, November 10, 2008, p. 137.  
PW-1086-6.  
PW-1080-2; R. Smith, September 5, 2008, pp. 102-105; D-1032.  
PW-1080-2.  
PW-1086-1, p. 4-5; R. Smith, September 5, 2008, p. 75; Prychidny, October 14, 2008, pp. 39-40.  
Prychidny, October 14, 2008, p. 74; October 15, 2008, pp. 192-195. See also PW-474, PW-1086-6.  
500-05-001686-946  
PAGE: 244  
on came from Castor, which Prychidny turned to when seeking instructions from the  
owner: «[…] there was no one else to turn to, there was no other Mr. Skyview or Mr.  
1
246  
.
Skyeboat or Mr. 321, it was just Castor or York Hannover […]»  
[
1154] The renovations contemplated by the Pannell Kerr Forster (“PKF”) appraisal in  
1247  
early 1987 were never funded and the projections for income were never achieved.  
[
1155] The CSH defaulted on its covenants year after year but Castor never enforced its  
security.  
1
248  
add in a  
[
1156] As at year end 1987, the loans already amounted to 49.3 million,  
contingent liability of 3.6 million and accrued interest receivable. Consequently, even  
before 1988 refinancing, Castor’s exposure exceeded by almost 8 million the lower  
range of the estimate of value provided by the PKF report.  
Even t s t a k in g p la ce d u r in g 1 9 8 8  
[
1157] The CSH project had been in Castor’s books since the early 80s and was  
1249  
refinanced in 1988.  
[
1158] Skyeboat and 321351 Alberta sold to Skyview their respective real estate, and  
operating assets and liabilities, and leaseholds, effective at the close of business on  
December 31, 19871  
250  
.
st  
1159] As a result of this 1988 restructuring, Castor created a 1 mortgage loan for 25  
nd  
[
million in the Montreal portfolio and a 2 mortgage loan for 16 million in the overseas  
portfolio (CHIF), and opened two deposit accounts: one for operating expenses and one  
for future renovations.  
[
1160] Security provided for the first and second mortgages included: a charge on the  
Calgary Skyline property, general assignment of revenues, leases and rents,  
assignment of the common shares of Skyview, assignment of the hotel management  
1
251  
.
agreement, and guarantees provided by Skyeboat and 321351  
[
1161] The $25 million first mortgage to Castor was further secured by a $6 million cash  
deposit agreement, a cash deposit with Castor. Of the $6 million deposited funds, $2.5  
million were to be used for capital renovations and $3.5 million were to be held as an  
interest reserve. As at December 31, 1988, the remaining deposited funds consisted of  
1
1
1
246  
247  
248  
Prychidny, October 15, 2008, pp. 194-195.  
R. Smith, September 5, 2008, pp. 143-146.  
PW-1053-27, seq. pp. 215-218, 230-231 (E212–E215, E227–E228) : audit confirmations returned to  
C&L  
1249  
1250  
1251  
R. Smith September 5, 2008, pp. 147-148; PW-1053-23, seq. p. 168.  
PW-468.  
PW-1087-1 and PW-1087-3.  
500-05-001686-946  
PAGE: 245  
$
2.5 million for the capital renovations reserve and $1.7 million for the interest  
1252  
.
reserve  
[
1162] CHL’s guarantee of the VTB to Four Seasons Hotel Ltd. for 3.6 million remained.  
1163] By December 31, 1988, Castor’s loans to 321351 Alberta and Skyeboat had  
[
increased from 6 million and 9.7 million, respectively, to 7.9 million and 10.8 million. The  
1
253  
.
loan increases resulted primarily from capitalized interest  
[
1164] The 3.6 million promissory note of 321351 Alberta’s owing to Four Seasons  
remained outstanding as at December 31, 1988.  
[
1165] At December 31, 1988, Skyview Hotels’ financial statements disclosed that the  
long-term lease obligation regarding equipment owing to Calgary Convention Centre,  
had an outstanding balance of approximately $739,000, unchanged from 1987, and that  
1
254  
.
other long-term lease obligations amounted to approximately $40,000  
[
1166] 1988 was the peak year for the hotel market and CSH’s most profitable year, but  
it was still not able to meet its debt service requirements and the hotel continued to lose  
1
255  
significant amounts of money after debt service.  
[
1167] In light of the ongoing difficulties with all of the YHHL hotels, the decision had  
1256  
In 1988, YHHL entered into  
been made in 1987 to try to sell the hotels as a group.  
negotiations to sell the hotels that it owned or managed all at once, but offers received  
1
257  
fell well below what was deemed acceptable by either YHHL or Castor.  
[
1168] According to Prychidny, a sale of the hotels at a realistic price would have  
1258  
crystallized huge losses for Castor, even in 1988, the peak year for the hotel market.  
[
1169] The loan documents required monthly payments of interests, annual placement  
fees and annual financial statements of Skyview, and such covenants were not being  
respected - interests and fees on the CSH loans were being systematically  
capitalized1  
259  
.
[
1170] The planned renovations were not done even though the 1987 PKF appraisal  
assumed that the renovations would be completed by February 1988: capital  
1252  
1253  
1254  
1255  
1256  
1257  
1258  
1259  
PW-167S and PW-167T.  
PW-167Q and PW-167R.  
PW-467A, Financial Statement Note 5.  
Prychidny, October 15, 2008, p. 175.  
Prychidny, October 14, 2008, pp. 154-160.  
D-1312, p. 418; PW-499, PW-499D, PW-2928; Prychidny, October 14, 2008, pp. 161-165, 169-170.  
Prychidny, October 14, 2008, pp. 155–161.  
PW-167R, PW-167Q, PW-167T  
500-05-001686-946  
PAGE: 246  
expenditures paid in December 1988 included $5,000 of “architectural fees related to  
hotel planned renovations”1  
260  
.
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
1171] At December 31, 1988, deducting the balance in hand of $4.2 million of the two  
Skyview deposits (capital renovations and interest reserve), Castor’s exposure in  
connection to loans made to the CSH was $59.4 million, which resulted from:  
Owed to CHL  
st  
•
•
•
Loan 1097 to Skyview - 25 million – secured by 1 mortgage;  
Loan 1147 to Skyeboat- 10.8 million – secured by a pledge of shares;  
Loan 1143 to 321351- 7.9 million – secured by a pledge of shares;  
Owed to CHIF  
•
Others  
•
Loan 790002/2005 to Skyview - 16 million – secured by second mortgage  
Guarantee (VTB) to Four Seasons - 3.6 million.  
In t er es t s r ecogn ized a s r even u e  
[
1172] The required reversal of interests and fees, in respect of the CSH for 1988, was  
1261  
.
in the amount of $4.8 million  
Loa n s a n d com m it m en t let t er s  
st  
nd  
[
1173] The loan agreements for the 1 and 2 mortgage loans provided that interests  
were to be paid monthly and the borrower was to provide annual financial statements,  
1
262  
prepared in accordance with GAAP by a CA.  
1174] With respect to the loans to 321351 and Skyeboat, the promissory notes  
[
indicated that interests were to be paid monthly and, in the event of default, the principal  
1
263  
and interests would immediately fall due.  
1260  
1261  
1262  
PW-467B, Bates page 000005.  
PW-2908, Vol. 1, pp. S-8 to S-10.  
PW-1087-1, PW-1087-3, PW-1087-3A.  
500-05-001686-946  
PAGE: 247  
CSH: m a r k et s t u d y  
[
1175] In early 1987, a new estimate of value was prepared by PKF providing a range of  
1264  
The estimate was based on a number of  
values between 45 million and 55.6 million.  
assumptions, including renovations that were to be completed within a year so that  
higher room rates and higher occupancy rates could be achieved in time for the Calgary  
Olympics of February 1988.1  
265  
[
1176] This PKF market study was based on projected revenues that were never  
actually achieved by the CSH.  
Ot h er in for m a t ion  
[
1177] Account 046 was used by Castor as the clearing account for the YH Group  
loans.  
[
1178] Account 046 was never used in connection with any of the loans connected to  
1266  
.
the CSH, a fact that Goodman acknowledged but could not explain  
Exp er t s ’ evid en ce  
[
1179] There is no dispute that there was a security shortfall on Castor’s loans in  
relation to the CSH.  
[
1180] All of Plaintiff’s experts agree that the audited consolidated financial statements  
of Castor were materially misstated because the carrying value of the loans connected  
to the CSH was overstated.  
[
1181] Based on the assumption that one can rely on the appraisal of the CSH, the  
Plaintiff’s experts identified the following minimum amount of loan loss provision  
required:  
Expert  
Vance  
Froese  
Rosen  
Minimum amount of LLP (or range of)  
9.4 million  
11.3 million1267  
3.8 to 14.4 million  
1
1
1
1
263  
264  
265  
266  
PW-1087-7, PW-1087-8, PW-1087-10.  
PW-469, bates 000004.  
PW-2941, Vol. 2, pp. 144–145.  
Goodman, October 26, 2009, pp.250 and following, namely p.254 “Again, I can't explain absolutely  
everything in this” and pp.255-256  
1267  
Froese, January 27, 2009, pp. 95 and following and PW-2941-4, Schedule 1  
500-05-001686-946  
PAGE: 248  
[
1182] Plaintiff’s experts also agree that: «the loans to 321351 Alberta, Skyeboat and  
Skyview Hotels should have been placed on a non-accrual basis as at December 31,  
1
988 or earlier» and «the financial implications to Castor of placing loans to borrowers  
connected to the Calgary Skyline on a non-accrual basis, and the magnitude of the  
increase in Castor’s allowance for loan losses, created uncertainty as to Castor’s ability  
to continue as a going concern».  
1
268  
1
269  
based on a market  
[
1183] Goodman identified a loan loss exposure of 11.9 million  
1
270  
value figure of 50.3 million . The 2.5 million dollar difference between Goodman and  
Vance represents the amount of the costs to complete renovations that Goodman did  
1
271  
.
subtract from his proposed market value  
[
1184] Despite the loan security deficiency on these loans, Goodman opined that there  
was no probable and estimable loss given that there was a loan security surplus  
position on the other components of the YH loan portfolio that was available to offset it.  
Such conclusion is based on Goodman’s presumption that the CSH was owned by  
1
272  
and that there was a right to offset against the surpluses in other YH  
Wersebe  
projects.  
[
1185] Goodman was the only expert for either party that concluded unequivocally that  
the CSH was beneficially owned by Wersebe (and therefore part of the YH Group)  
1
273  
For example, Selman suggested that Stolzenberg may  
during the relevant years.  
have owned the leasehold rights.  
1
274  
[
1186] Goodman relied on two references to support his statement that 321351 was  
1275  
owned by Wersebe: the testimony of Baudet, and exhibit PW-1086-3.  
[
1187] Goodman also concluded, “from an accounting perspective” as he said, that  
1276  
and the  
Lambert was owned by Wersebe – that Wersebe was the beneficial owner  
1
277  
.
ultimate shareholder of Lambert  
[
1188] With respect to the beneficial ownership of Skyeboat, Goodman asserted that the  
shares were held by Lakeland and Lambert, and relied on the testimony of Baudet to  
conclude that the beneficial owner was Wersebe.  
1268  
1269  
1270  
1271  
1272  
1273  
1274  
1275  
1276  
1277  
PW-2941, Vol. 2, p. 126; PW-3033, Vol. 2, Appendix G, p. 5.  
D-1312, pp. 429–430.  
D-1312, p.427  
D-1312, p.436  
Goodman, October 26, 2009, pp.33-34, 40 and following, 59-61, 65,113-114, 137  
D-1312, p. 416.  
D-1295, pp. 33–34, para.4.1.33.  
D-1312, p. 416, ftn 760 and 762.  
Goodman, October 26, 2009, pp.176-187  
Goodman, October 26, 2009, pp.187-190  
500-05-001686-946  
PAGE: 249  
[
1189] Goodman acknowledged that over the years, namely at year-end, cross  
collateralization was done through agreements as Castor and its borrower agreed to  
such course of action1  
278  
.
Conclusions  
[
1190] Baudet never testified that 321351 was owned by Wersebe, and exhibit PW-  
1
086-3 expressly states that a lawyer was the legal and beneficial owner of 321351.  
1279  
[
1191] Assessing evidence available , Goodman came to the conclusion that CSH  
and Lambert were “owned” by Wersebe and therefore, loans to CSH were part of the  
YH group of loans.  
[1192] The Court does not share Goodman’s point of view in light of the following:  
•
•
The content of Smith’s, Prychidny’s and Whiting’s testimonies (hereinabove  
mentioned) and the content of exhibits PW-234, PW-235, PW-236A, PW-236B,  
PW-465B, PW-466C, PW-1086A, PW-1086-4 and PW-1463-10;  
The fact that account 046 was never used in connection with any of the loans  
connected to the CSH, supports the conclusion that neither Castor nor York-  
Hannover believed that Wersebe was the owner of the CSH.  
•
•
Other evidence that, during the 1988 to 1990 period, ownership decisions were  
made by Castor1 ; and  
280  
Wightman’s handwritten inscriptions in the AWPs made during the year-end  
wrap-up meeting with Stolzenberg “Skyline loans are actually split between four  
owners” and “The only common feature is that they were under management by  
Skyline”.1  
281  
[
1193] CSH deficiencies could not be offset by alleged surpluses in the YH group of  
loans and a material LLP was needed.  
OSH  
Additional evidence specific to OSH  
Pr ior t o 1 9 8 8  
1
1
1
278  
279  
280  
Goodman, October 26, 2009, pp.67-72  
Goodman, October 26, 2009, pp.128, 172-173, 239-241, 243  
See the sections of the present judgment relating to LLP for TSH in 1988, 1989 and 1990 and LLP  
for CSH in 1989 and 1990  
1281  
PW-1053-12, page 77  
500-05-001686-946  
PAGE: 250  
[
1194] In the early 80s, Campeau had provided the YH group with an allowance of 5  
million for renovations, but only 2 million of such sum was actually used for the OSH.  
Therefore, as early as 1985, the OSH was a “tired” hotel while YHHL still had to pay a  
rent, which had been increased in order to allow Campeau to amortize the 5 million  
1
282  
leasehold improvement payment for renovations.  
[
1195] Castor’s involvement with the OSH and its loans to Skyline (80) commenced in  
984. Castor’s loan was thereafter been extended annually.  
1
[
1196] From the outset, the hotel could never generate sufficient revenue for YHHL to  
meet its lease payments to Campeau, let alone to service its interest and fee obligations  
to Castor.  
[
1197] From 1987 and up to the 1991 period, Campeau repeatedly sent letters of default  
1283  
As an example : on July 26, 1988, Campeau  
to YHHL, Skyline (80) and Castor.  
wrote the following letter :  
Skyline Hotels (1980) Ltd. (“Skyline”) is in default of its covenant to pay rent  
under the Lease with Campeau Corporation (…)  
Please be advised that the Lease as modified is hereby forfeited subjects to all  
rights of Campeau Corporation (…)  
Campeau Corporation requires vacant possession of the leased premises. In  
recognition of the fact that a hotel operation is on-going, Campeau Corporation is  
prepared to allow you a period of two weeks from today’s date in order to close  
down or move the hotel operation from the leased premises. However, this two  
week grace is conditional upon receipt by Campeau Corporation of the attached  
Consent to the issuance of a Writ of Possession executed by Skyline (…)1284  
Even t s t a k in g p la ce d u r in g 1 9 8 8  
[
1198] 1988 Financial statements of Skyline (80) indicate:  
•
•
•
•
$1,875 of income before interest and rent;  
$1,804 of rent;  
$4,726 of interest expense;  
$4,655 of loss before depreciation; and  
1282  
1283  
1284  
Prychidny, October 14, 2008, pp.42-43; Prychidny, October 15, 2008, pp.144-147  
Prychidny, October 15, 2008, pp. 145-153; PW-450 series  
PW-450-W  
500-05-001686-946  
PAGE: 251  
•
$15,097 of shareholder deficiency1285  
.
[
1199] OSH did not perform well financially. Its levels of profitability were not even close  
to the projections that were included in the Fitzsimmons appraisal dated July 22, 1988,  
which is referred to further on in the present judgment.  
[
1200] In order that a settlement could be reached with Campeau, the landlord, CHL  
advanced $949,048.64 which was charged to Loan 1121/1123 in the name of YHHHL –  
and was described as “$4mm Grid Note, Skyline 80” in the loan ledger.  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
1201] As at December 31, 1988, the following amounts were owed to Castor in relation  
to the OSH:  
•
•
Loan 10491286 to Skyline 80 - $10.4 million  
Part of loans 1121/1123 to YHHHL1287 - $992,000.  
[
1202] Loan 1049 was secured by a fixed and floating charge debenture on all assets of  
the borrower, including furniture, fixtures and equipment of the Ottawa Skyline Hotel,  
assignment of leasehold of hotel, and pledge of various shares of YHHHL, YHHIL,  
YHHL and Skyline 80.  
[1203] Skyline 80's only significant asset was its leasehold interest in the OSH.  
In t er es t s r ecogn ized a s r even u e  
[
1204] Interests on Loan 1049 were capitalized on a monthly basis through account 046  
and, at the year end, a circular transaction (cash circle) was made to offset the accrued  
interests.  
Loa n s a n d com m it m en t let t er s  
1
288  
the borrower  
[
1205] The loan documentation for loan 1049 to Skyline (80) called for  
to provide annual financial statements, revenue and expense statements, rent rolls and  
statement of capital expenditures when requested by the lender, and also to pay when  
due all accounts payable and taxes owing on the lease. None of these covenants was  
being fulfilled by the borrower, who also failed to pay interests and fees when due.  
1285  
1286  
1287  
1288  
PW-454  
PW-453-1  
PW-452  
For example, see PW-1093-1  
500-05-001686-946  
PAGE: 252  
OSH a p p r a is a ls  
[
1206] The appraisal figures used by C&L for the purpose of their 1988 audit were  
1289  
based on a Mullins appraisal of the leasehold interest dated January 15, 1985  
which gave the leasehold interest a value of $9.5 million, and on an appraisal of  
General Appraisal of Canada Limited (“General Appraisal”) dated January 22,  
1290  
985 , which gave the furniture and equipment a value of $5.6 million, for a total  
1
value of $15.1 million.  
•
•
The value given by General Appraisal is a replacement value (new  
equipment).  
The value given by Mullins appears to also include the value of the furniture,  
1
291  
.
the fixtures and the equipment  
1
292  
commissioned by a third party (in  
[1207] An appraisal prepared by Fitzsimmons  
connection with a failed Maritime Life refinancing), dated March 1, 1987, established a  
future potential value of $29 million based on a $10.4 million renovation program being  
carried out on the hotel, which operates for a time after such renovations are done in  
order to fully implement the planned management and the marketing programs. $16  
million of that $29 million appraisal value is ascribed to the freehold interest of  
Campeau. Therefore, in order to achieve the $13 million value left to Skyline 80, a  
renovation program in excess of $10 million had to be performed.  
1
293  
[
1208] Another appraisal was obtained, the Juteau valuation  
dated July 22, 1987,  
also premised on the same renovation program costing in excess of $10 million. As  
opposed to the Maritime Life situation, however, this appraisal was commissioned by  
YH and not by an outside lender. This appraisal determined that the freehold value of  
the property was approximately $33.8 million, and that the leasehold value to Castor,  
after renovation, was $16.7 million.  
Ot h er in for m a t ion  
[
1209] When Maritime Life received the Fitzsimmons appraisal, it reduced its financing  
proposal from $10 million to $6 million. An additional $3 million would be provided only if  
the hotel achieved the projected performance. In view of such reduction, and because  
1
294  
the investment clearly did not make sense, the Maritime Life financing lapsed.  
1289  
1290  
1291  
1292  
1293  
1294  
PW-460  
PW-461  
PW-460, bates #000015, 000045, 000047, 000050, and 000055  
PW-462  
D-44  
Prychidny, October 15, 2008, pp. 167-168.  
500-05-001686-946  
PAGE: 253  
[
1210] Prychidny testified that, as the manager and the person mandated to operate the  
hotel, it didn’t make business sense to spend $10 million to potentially earn $3 million of  
value.1  
295  
[
1211] Prychidny testified that he expressed to Stolzenberg, from 1988 onwards, that  
1296  
.
the OSH was «worth nothing»  
Exp er t s ’ evid en ce  
[
1212] Only Vance and Goodman provided an opinion with respect to the OSH. They  
both computed a security deficiency. The more significant difference between Vance  
and Goodman relates to the use of the appraisals in relation to this property.  
[
1213] Vance opined that the available appraisals could not be used as audit evidence  
given the unrealistic assumptions that had been used, and that no value, or very little  
value ($0.6M), should be given or could be given to the leasehold interest, which could  
be forfeited by Campeau.  
[
1214] Vance also came to the conclusion that no value could be given to Skyline 80  
1297  
.
shares in light of their 1988 financial statements  
[
1215] Vance opined that a minimum loan loss provision of 10.9 million should have  
been recorded and that all interests and fee revenue on the OSH loans ($2.16  
1
298  
million ) should have been reversed.  
[
1216] Goodman acknowledged that there was a deficiency in Castor’s loan position of  
1
299  
based on the $6.7 million value that he attributed to the leasehold  
$
6.3 million  
1
300  
.
interest  
[
1217] On the usefulness of the appraisals, Goodman wrote: “the Juteau appraisal, in  
my view, was the most appropriate to use in the calculation of the December 31, 1988  
freehold market value of the property, whereas the Fitzsimmons appraisal was the most  
credible in providing an estimate of the required renovation costs to achieve the  
freehold market value”.1  
301  
[
1218] Goodman nevertheless concluded that it was reasonable for Castor not to record  
a LLP since there were other amounts of surplus to offset the deficiency.  
Conclusions  
1295  
1296  
1297  
1298  
1299  
1300  
1301  
Prychidny, October 15, 2008, pp. 163, 166.  
Prychidny, November 3, 2008, p. 40.  
PW-454  
PW-2908, Vol. 1, S-8 to S-10.  
D-1312, p.458  
D-1312, p. 453  
D-1312, p.448  
500-05-001686-946  
PAGE: 254  
[
1219] The loans associated with the OSH were in default, non-performing and the  
project was in severe financial difficulty.  
[
1220] In cases where the borrowers are in breach of their loan covenants, where they  
cannot and do not pay interests or fees for several years, and where the leasehold  
interest is on the brink of forfeiture every single month, GAAP cannot be interpreted as  
principles allowing the fact that there is reasonable assurance of the collectability of the  
revenue associated with such loans.  
[
1221] Goodman’s theory that surpluses in the YH group of loans existed and could be  
used to offset deficiencies is rejected, as discussed earlier and further on in the present  
judgment.  
[
1222] Vance’s opinion that a material loan loss provision was required, and that all  
interests and fees associated with these loans should have been reversed, and the  
loans placed on a non-accrual basis, prevails.  
500-05-001686-946  
PAGE: 255  
TWTC  
Positions in a nutshell  
Pla in t iff  
[
1223] Plaintiff submits that because Castor’s loans added no value to these projects,  
which were already seriously over-leveraged, Castor would have had no effective way  
of protecting its position other than to take over the prior ranking debt. Castor did not  
intend nor did it have the ability to do that.  
[
1224] Plaintiff says that, in each case, Castor was sitting in subordinate positions to  
project lenders and co-developers, with no direct security on the real estate, and was  
unable to control its own destiny.  
[
1225] Even though the circumstances revealed by the evidence lead Plaintiff’s expert  
Vance not to recommend a LLP in his 2008 report, Plaintiff submits it is clear that there  
was no available surplus to Castor.  
[
1226] Moreover, Plaintiff asserts that all of the TWTC loans should have been placed  
on a non-accrual basis for 1988 and that all revenue and fees capitalized to the loans  
$4.4 million) should have been reversed over in accordance with GAAP.  
(
Defen d a n t s  
[
1227] Defendants argue no LLP was required in 1988 in relation to TWTC. Rather, a  
surplus in the amount of $26.6 million was available to Castor to apply to other YH  
positions.  
Additional evidence  
Loa n s a s of Decem ber 3 1 , 1 9 8 8 a n d s ecu r it y  
[
1228] As of December 31, 1988, Castor’s exposure for loans relating to the TWTC  
amounted to 47.7 million:  
•
•
•
•
•
Loan 1046 to TWDC: $18.2 million  
Loan 1067 to YHDL.: $ 15.5 million  
Loan 1120 or 1149 to TWTCI : $10 million  
Loan 1090 to YHDL: $3.3 million  
Investment in TWTCP : $ 0.6 million  
500-05-001686-946  
PAGE: 256  
[
1229] As of December 31, 1988, the security that Castor held for its loans was  
essentially a pledge of equity interests (as opposed to a mortgage on a property)  
1
302  
1303  
which, altogether, represented a 36.24% interest in the TWTC equity .  
Loa n 1 0 4 6  
[
1230] Loan 1046 to TWDC was initially made in December 1984, for $4.5 million, at the  
1304  
interest rate of prime plus 6% . There was no credit assessment made before the  
loan was granted1  
305  
.
[
1231] The loan was for one year and the principal and accrued interests were both due  
and payable on December 14, 1985. As one covenant, TWDC was to provide annual  
1
306  
.
financial statements to CHL within 120 days of its fiscal year end  
[
1232] In September 1985, the loan was increased with a one year term to September  
3
0, 1986. The interest terms were changed in that an “Interest Reserve” was  
1307  
As long as there was credit available, the monthly interest charges were to  
created.  
be paid by using the Interest Reserve and increasing the loan. Again, TWDC undertook  
1
308  
.
to provide annual financial statements to CHL within 120 days of its fiscal year end  
1309  
[
1233] The loan increased to $12.5 million . Part of the increase of the loan was to  
pay a syndication fee to CHIF which was trying to syndicate part of the project to  
European investors.1  
310  
[
1234] At the end of December 1986, the loan was again increased to $15 million1311  
.
[
1235] Castor's collateral security for Loan 1046 was a pledge of the shares of TWTCI  
1312  
.
owned by TWDC and ranking in second position behind a pledge to Bimcor  
[
1236] No payments were ever received on Loan 1046, interest was continually  
capitalized and the loan was extended for one more year on each annual maturity  
date1  
313  
.
1
1
1
1
1
1
1
1
1
302  
303  
304  
305  
306  
307  
308  
309  
310  
Goodman, September 23, 2009, pp.179-180  
Goodman, September 23, 2009, p. 180  
Ron Smith, September 16, 2008, pp.96 and following; PW-1067-1  
Ron Smith, September 16, 2008, p.98  
PW-1067-1  
PW-1067-3 (section “purpose” item 4)  
PW-1067-3, page 5  
PW-1067-3  
Ron Smith, September 16, 2008, pp. 99-100; PW-1067-3 (section “purpose”, item 2 at page 1 of the  
Loan summary)  
1311  
1312  
1313  
PW-1067-5  
PW-1067-1 (section “Security” at pages 1 and 2 of the Loan summary)  
Ron Smith, September 16, 2008, pp. 100 and following; see also PW-167 (loan 1046); PW-1067-7  
and PW-1067-10  
500-05-001686-946  
PAGE: 257  
Loa n 1 0 6 7  
[
1237] Loan 1067 to YHDL was initially advanced in December 1985, as part of the  
1
985 year-end transactions (account 046), with a one year term requiring interest, at the  
1
314  
rate of prime plus 6%, to be paid on a monthly basis . Within 120 days of its fiscal  
1
315  
year end, YHDL undertook to provide annual financial statements to CHL . No credit  
1
316  
.
assessment was ever done by Castor  
[
1238] Loan 1067 was at the $8 million level in 1986 and increased to $15.5 million by  
1317  
.
December 31, 1987  
[
1239] Loan 1067 was renewed and extended on or before each annual maturity date  
throughout the period the loan was outstanding and no payments of principal or interest  
were ever received by CHL1  
318  
.
[
1240] The collateral was a pledge of the shares of TWTCI owned by YHDL1319  
.
Loa n 1 0 9 0  
[
1241] Loan 1090 was initially advanced in December 1987 in the amount of  
1320  
3,300,000 , at the interest rate of prime plus 6%, and was part of the 1987 year-end  
$
cash circle transaction whereby the proceeds were then returned to CHL as repayments  
1
321  
of other YHDL indebtedness . No credit assessment of the debtor of the loan was  
ever done by Castor1  
322  
.
[
1242] As Ron Smith said “there were only so many projects available at that point in  
1
323  
.
time and we were starting to run out of the projects to attach ourselves to”  
1
324  
[
1243] Loan 1090 was secured by two options : one option to acquire 50% of the  
1
2.5% of the TWTC project from 752608 Ontario Limited, and one option to acquire  
6% of the outstanding units in the Skyline Triumph Limited Partnership. In order to  
7
exercise the first option - to acquire 50% of the 12.5% of the TWTC project from 752608  
Ontario Limited- a further payment of $5,971,250 plus interest from December 1, 1987  
1
325  
would be required . Similarly, the option to acquire the units in the Skyline Triumph  
Limited Partnership required a further payment.  
1314  
1315  
1316  
1317  
1318  
1319  
1320  
1321  
1322  
1323  
1324  
1325  
PW-1066-B; PW-1068-1; Ron Smith, September 16, 2008, pp. 108 and following  
PW-1068-1 (page 3)  
Ron Smith, September 16, 2008, p. 110  
PW-1068-3, PW-1068-5 and PW-1068-7  
PW-1068 (series)  
PW-1068-1 (page 2)  
PW-1061-1; PW-1066B  
PW-1056A-1  
Ron Smith, September 16, 2008, p.116  
Ron Smith, September 16, 2008, p. 112  
Ron Smith, September 16, 2008, pp.114 and following  
PW-1061-3 and PW-1061-4  
500-05-001686-946  
PAGE: 258  
[
1244] In 1988, to further reallocate year-end indebtedness, Castor made Loan 1120 to  
TWTCI.  
Loa n 1 1 2 0  
1326  
1245] Loan 1120 to TWTCI was created in December 1988 , as part of the 1988  
1327  
[
year-end cash circle transaction , with a term to December 15, 1992. Interest was to  
be payable monthly commencing with January 1, 1989. TWTCI undertook to provide  
annual financial statements within 120 days of its fiscal year end to CHL.  
[
1246] Castor agreed at that point in time to provide up to 15 million dollars financing to  
TWTCI, 9 million of which would be a reallocation of the YH year-end (account 046),  
1
328  
.
and 6 million of which would be a portion to assist YH for any ownership cost  
1247] One of the first costs covered was the repayment of the Bimcor/Northern  
[
Telecom loan in an amount slightly over a million dollars: the disbursement took place  
1
329  
by the end of 1988 . YH did not have the money and they asked Castor to fund the  
reimbursement1  
330  
.
[
1248] Throughout the period the loan was outstanding, no payments of interest were  
ever received by CHL.  
[
1249] As part of the loan to TWTCI, Castor was to obtain a legal opinion to the effect  
that the security had been duly executed and constituted a first charge on the  
1
331  
borrowers’ pledged assets . Castor attempted unsuccessfully to register its security  
interest in TWTCl against the TWTC property: the co-ownership agreements between  
YHDL and Camrost required that Camrost approve any such registration, but no such  
approval was ever obtained1  
332  
.
Pr ior t o 1 9 8 8  
[
1250] YHDL’s partner in TWTC, Camrost, was primarily a residential developer,  
1333  
.
although they did have some commercial projects  
[
1251] It had been agreed between partners in the project that any proceeds from the  
sale of the condominium towers would be used as equity for the development of the  
office sites1  
334  
.
1326  
1327  
1328  
1329  
1330  
1331  
1332  
1333  
Ron Smith, May 14, 2008, pp.159-160; PW-1069-1  
Vance, April 16, 2008, p.71-72  
Ron Smith, September 16, 2008, p.106, 122 and following, p.128 ; PW-1069-1 (section “purpose”)  
Ron Smith, September 16. 2008, p.126  
Ron Smith, September 16, 2008, p.129  
PW-1069-1 (item 4, page 3)  
Ron Smith, September 16, 2008, p. 130-131; Goodman, November 23, 2009, p.202  
Ron Smith, September 16, 2008, p. 94; Goodman, September 23, 2009, p. 156  
500-05-001686-946  
PAGE: 259  
[
1252] As per the partnership agreement, Camrost had the right to buy out YH at 85% of  
1335  
.
the project total value in the case of a default by YH  
[
1253] York-Hannover had planned to syndicate off its position to investors through  
1336  
TWDC .Then, rather than syndicate in TWDC, they decided they would syndicate  
their positions from TWTCI, and they did succeed in syndicating part of their position (to  
6
96604 Ontario Ltd.- Peter Luerssen, Elfh – Stolzenberg) 1337  
.
[
1254] As early as June 1987, York-Hannover was already in default to its co-owner  
1338  
Camrost.  
1
9 8 8 even t s  
1255] TWTC was YHDL’s largest planned development project 339. TWTC was an  
1
[
important and ambitious project in downtown Toronto, well situated 340.  
1
[
1256] The building permits were submitted in December 1987 and the TWTC  
condominium project went into "development mode" on January 18, 1988. The  
condominium lands were acquired outright from The Toronto Harbour Commissioners  
1
341  
on May 24, 1988 and construction began shortly thereafter.  
[
[
1257] By June 1988, 90% of the 699 units had been pre-sold1342  
1258] The planned costs of construction were over $600,000,000 . The approved  
.
1
343  
1
344  
budget for the construction of the two condominium towers was $193 million . The  
1
345  
projected costs for the construction of the office towers were $422 million  
.
[
[
1259] Construction of the two condominium towers commenced in September 19881346  
1260] At September 30, 1988, the financial statements of the office and commercial  
.
project indicated a bank indebtedness of $6,144,843 while the condominium project  
1
334  
Ron Smith, September 16, 2008, p.142-143; Ron Smith, September 24, 2008, p.52; Goodman,  
November 23, 2009, pp.213 -214  
1335  
1336  
1337  
1338  
1339  
1340  
1341  
1342  
1343  
1344  
1345  
1346  
Goodman, November 23, 2009, p.203-204; PW-1161-9  
Ron Smith, September 16, 2008, p. 91  
Ron Smith, September 16, 2008, pp. 91-92  
PW-1161-7.  
Goodman, September 23, 2009, p.155  
Ron Smith, September 24, 2008, p.49  
PW-1069-18  
PW-1069-1  
PW-1161-20 cover page and p. 1 ; PW-1069-18 bates p. 62  
PW-1161-20; Goodman, September 23, 2009, p. 158  
PW-1069-18; Goodman, September 23, 2009, p.159  
PW-1069-20, bates p. 3 and Goodman, September 23,2009 p. 162-163  
500-05-001686-946  
PAGE: 260  
financial statements indicated a bank loan of $1,300,000 outstanding at October 31,  
1
347  
.
1988 for total prior ranking debt of $7,444,843  
[
1261] By December 1988, 94% of the units had been pre-sold and the projected sell-  
1348  
out value was $2.0 million higher than the approved budget.  
[
1262] As at December 31, 1988 the construction of the office and commercial project  
had not even started.  
1349  
1263] The first renewal of loan 1046, in 1985 , had provided for an interest reserve of  
1,878,000. By 1988, that interest reserve had been totally utilized and the borrower  
[
$
was contractually obliged «to put on deposit with the lender sufficient funds to cover all  
remaining anticipated monthly interest and extension fee payments through to the  
maturity date of the loan.»1  
350  
[
1264] Ron Smith provided C&L with a chart concerning the current legal ownership  
1351  
.
structure of the TWTC as of November 1988  
[
1265] Castor’s position on TWTC was a backend position, said Ron Smith :1352  
«
Well, we weren’t at that position, we were funding the co-ownership equity  
position at the back end. There were lenders directly on the projects that were  
providing acquisition financing for the sites, they were providing development  
financing for the various condo projects, and they had direct mortgages on those  
properties, so they had provided the funding for that to the joint venture. So we  
weren’t even at that level, we were way behind that level and we were just relying  
on the co-ownership interest to collateralize our position.»  
[
1266] The risk of not realizing anything from the collateral was far greater with an  
1
353  
equity position as security for the loans, added Ron Smith:  
«
Oh, mathematically, you can take percentages and go against general  
valuations, but until you actually realize on your positions and actually sell the  
project, sell the condominiums, pay off all the parties going down, you really don’t  
know what you’re going to get. It’s … probably the best position you’re going to  
get is on paper which is a projection, but when you come down to the final  
position, there’s a lot of things that are going to crop up that you’re not aware of  
at the front end. So it’s very difficult to say you’re going to get that amount of  
money.»  
1347  
1348  
1349  
1350  
1351  
1352  
1353  
PW-1069-21  
PW-1069-20  
PW-1067-3.  
PW-1067-10, page.2; PW-1067-12, page 3; PW-1067-15, page 2.  
Ron Smith, September 16, 2008, p. 180  
R. Smith, September 16, 2008, p. 154.  
R. Smith, September 16, 2008, pp. 151-153.  
500-05-001686-946  
PAGE: 261  
Ap p r a is a ls  
[
1267] As of February 12, 1987, Stewart, Young & Mason appraised a 50% part in the  
1354  
TWTC project between $62.6 and $104 million . No C&L audit staff member ever  
questioned Ron Smith regarding the assumptions in this Stewart, Young & Mason  
1
355  
.
appraisal, the only appraisal Castor had for the audit  
[
1268] In their AWPs, C&L referred to a Stewart Young & Mason appraisal which would  
1356  
The evidence in the record  
establish a value between $182 million and $285 million.  
is that such appraisal does not exist.  
[
1269] The evidence shows that in June 1988, Royal LePage prepared a valuation of  
TWTCl's 50% undivided interest in the estimated equity distributions from the TWTC  
condominium project. This was before construction started, but well after the sales  
program had already demonstrated a significant level of pre-sales. Royal LePage  
estimated that the equity of a 50% interest had a value of $38.4 million (i.e. $76.8 million  
1
357  
for a 100% interest) . This amount included a value for the retail centre within the  
1
358  
.
condominium towers amounting to approximately $5.9 million  
Loa n coven a n t s  
[
1270] In the commitment letters, YHDL covenanted to provide interim and annual  
1359  
Notwithstanding such covenants, YHDL never provided  
financial statements.  
financial statements during the relevant years nor did it meet its interest obligations. All  
1
360  
interest was merely capitalized to account 046/Loan 1153.  
Exp er t s ’ op in ion s  
[1271] Plaintiff’s three experts each dealt with Castor’s loans to TWTC differently.  
•
Vance had originally opined that a loan loss provision was required for the TWTC  
project, in his 1997 report, but in his 2008 report, he did not recommend any  
loan loss provision because of the uncertainty regarding the value of the TWTC  
1
361  
land sites and whether this would flow to Castor.  
•
•
Rosen recommended a $25 million LLP.  
Froese did not provide any opinion regarding the TWTC project.  
1354  
1355  
1356  
1357  
1358  
1359  
1360  
1361  
PW-1069-17  
Ron Smith, September 16, 2008, p.163-166, 172-173, p.178-179  
PW-1053-23, seq. p. 201.  
PW-1069-18A; PW-1161-21; PW-1161-11; PW-1161-6; PW-1161-12  
PW-1069-18A  
PW-1068-1.  
PW-1056F.  
PW-2908, Vol. 2, D-14, D-15.  
500-05-001686-946  
PAGE: 262  
Va n ce  
1362  
1272] In his 1997 report, Vance concluded that a $43 million LLP was required . In  
[
testimony at the first trial he produced new calculations using a different methodology  
1
363  
and retained a $28 million LLP (the low end of his calculations of LLP) . In the current  
trial, Vance did not recommend a LLP.  
1
364  
[
1273] Vance computed a number of possible loss scenarios  
but declined to  
recommend any loan loss provision due to uncertainty.  
1
365  
which  
[
1274] The evidence leading to Vance’s change of opinion was an appraisal  
1
366  
.
“
would appear on the face of it to provide value for the loan”  
[
1275] Vance explained that the Coldwell Banker appraisal (the appraisal that made him  
change his opinion) raised some questions because it only appraised two of the three  
sites for the office towers, a situation which he found odd. Nevertheless, applying the  
same value to the third site (assuming that value could be realized), there was enough  
1
367  
doubt in his mind for him not to recommend a LLP.  
[
[
1276] Vance admitted that the changes to his opinion were material1368  
1277] Vance characterized Castor’s security as “poor”, the reason being that although it  
.
could become owner of the shares and partnership units, Castor could not force the  
sale of the project1  
369  
.
[
1278] Vance opined:  
"
Offers in the real estate industry are often very speculative and contain a  
number of conditions that can render the amount somewhat meaningless”.  
"
A listing is even more uncertain than an offer as an indicator of value”.1370  
[
1279] As opposed to Goodman, who opined on that topic as follows:  
Whether the offers and listings referred to by Vance were speculative and  
uncertain or not, they were indicative of judgments taken by individuals who were  
closest to the TWTC real estate project at the time and, in the absence of  
completed transactions, were useful sources of information on the facts,  
1362  
1363  
1364  
1365  
1366  
1367  
1368  
1369  
1370  
Vance, April 18, 2008, p.163  
Vance, April 18, 2008, p.165  
PW-2908  
PW-1161-24; Vance, April 16, 2008, p. 200  
Vance, March 4, 2008, pp. 40-41  
Vance, April 15, 2008, pp.45 and followings; Vance, April 18, 2008, pp.167-168  
Vance April 18, 2008 p. 163-168 and 177, PW-1467-1  
PW-2908, volume II, page D-2  
PW-2908, Volume II, p. D-9  
500-05-001686-946  
PAGE: 263  
circumstances and evidence that had to be used for the preparation of timely and  
reliable loan valuation estimates in accordance with GAAP.1  
371  
Ros en  
[
1280] The only one of Plaintiff’s experts to opine on the required loan loss provision for  
1372  
TWTC was Rosen. His minimum loan loss provision for 1988 was $25 million.  
Good m a n  
[
1281] Goodman opined that not only no loan loss provision was required for the TWTC  
loans but, rather, there was a substantial surplus of $26.6 million that Castor was  
entitled to utilize to offset against other loan deficiencies elsewhere in the YH  
portfolio1  
373  
.
[
1282] Goodman used a combined total value of $226.5 million, all derived from a Royal  
1374  
:
LePage analysis  
•
For the condominium component of the project, and as the condominiums  
were almost all pre-sold, Goodman used the estimated cash profit, i.e. $47  
1
375  
.
million net of costs to complete  
1
376  
,
•
For the office towers component of the project, a development project  
1
377  
Goodman valued the retail component at $5.9 million  
and the office  
1
378  
.
component at $173.6 million  
[
1283] Contrary to Vance, Goodman felt there were plenty of value indicators with  
1379  
.
respect to the land sites  
[
1284] Goodman applied the percentage of interests over which Castor had direct and  
1380  
.
indirect interests (36.24%) to the value of the collateral  
[
1285] Goodman calculated that Castor’s exposure was $47.9 million including the loan  
balances of loan 1046 ($18.2), loan 1067 ($15.5), loan 1090 ($3.3), loan 1149 ($10.0),  
the investment in TWTCLP units ($0.6 million) and the accrued interests ($0.3 million).  
1371  
1372  
1373  
1374  
1375  
1376  
1377  
1378  
1379  
1380  
D-1312, pp.220-221  
PW-3033, Vol. 2, Appendix E, p. 3; PW-3033-1.  
D-1329; Goodman, September 23, 2009, pp.175 and following  
Goodman, September 23, 2009, p.187-188  
D-1312, TWTC-3 and PW-1069-18, bates 16; Goodman, September 24, 2009, p. 27-28  
Goodman, September 23, 2009, pp.155-156;  
PW-1069-18A  
D-1330 and PW-1161-24; Goodman, September 24. 2009, pp.30 and following  
Goodman, September 23, 2009, p.184  
Goodman, September 24, 2009, p.37  
500-05-001686-946  
PAGE: 264  
[
1286] Goodman explained1 he had no problem with the fact that Castor was unable  
381  
to force a sale of the project because that was not Castor’s strategy or intent. What was  
very important was that Castor could become an owner of the shares and partnership  
units, because that is where the value was.  
[
1287] Goodman’s security enforcement plan for Castor was as follows:  
•
•
•
In the event of YHDL's default for non-payment of principal or interest, Castor  
would realize the value of its TWTCl security by enforcing its security on  
those TWTC loans that would provide Castor with the shares of TWTCl and  
Proko Options Inc.  
Castor would have been able to work with Camrost, a 50% owner of the  
TWTC, to complete the condominium project and to develop one office tower  
on site 1, even though the joint venture agreements with Camrost required  
that YHDL be the joint venture partner.  
Camrost and Castor would have chosen not to build on the other office tower  
land (sites 2a and 2b) until a buyer could be found or lead tenants signed up.  
[
1288] The difference between Rosen’s minimum LLP of $25 million and Goodman’s  
surplus of $26.6 million is attributable to disagreements on the value of TWTCl's equity  
that was held as security or directly owned by Castor.  
In t er es t s r ecogn ized a s r even u e  
[
1289] In 1988, Castor recognized 4,447,053 in interests and fees on loans 1046 and  
067:  
1
•
•
•
Interests on Loan 1046: $1,778,934  
Fees on loan 1046: $ 558,420  
Interests on loan 1067: $2,109,699  
Conclusions  
[
1290] Castor’s security was totally dependent on the potential sale price of the TWTC  
project and the timing of any sale, after completion.  
[
1291] If preponderance of evidence leads to not recognising a LLP, it does not mean,  
as Goodman would have the Court conclude, that there was an available surplus to  
offset other YH liabilities.  
1381  
Goodman, September 23, 2009, pp.178-181  
500-05-001686-946  
PAGE: 265  
[
1292] Goodman’s opinion as to the alleged value of the TWTC and the supposed  
surplus that would be available to Castor does not stand up to scrutiny.  
•
Goodman ascribes to the TWTC a value of $226.5 million in 1988, $261.8 million  
in 1989 and $277.2 million in 1990. In fact, Goodman concludes that the fair  
market value of the TWTC office land sites purchased for $12.6 million was  
1
382  
This value is totally inconsistent with the marketing  
$
187.3 million in 1990.  
results of Coldwell Banker when it exposed the property to the market, discussed  
later in the present judgment.  
•
Goodman further relies on a Stewart, Young & Mason appraisal, as a value  
indicator, which neither Smith nor Whiting saw and which was never provided to  
C&L. While having chosen to refer to an unseen Stewart, Young & Mason  
appraisal, Goodman admitted that he did not consider nor include in his Report:  
o reference to PW-1069-17 which indicated a lower value;1383  
o the fact that the 7.51% interest in the TWTC project held by 696044 was  
acquired from Peter Luerssen for an implied total project value of $94  
million; or,  
o the testimony of Whiting that the market value for the entire TWTC project  
1
384  
in 1990 was $150 million.  
[
1293] On the preponderance of evidence, the Court concludes there was no surplus  
available.  
Meadowlark  
Positions in a nutshell  
Pla in t iff  
[
1294] Plaintiff says Castor’s loans related to Meadowlark were in jeopardy virtually from  
the beginning of this financing (in the early 80s) because of the inability to compete with  
the West Edmonton Mall (“WEM”) located about a mile away. As financing to carry out  
planned renovations could not be raised, the project’s losses continued to increase.  
[
1295] Plaintiff adds that by the end of 1988, Castor had determined that Meadowlark  
could not successfully emerge from the shadow of the WEM. The decision was made  
1
385  
for both Castor and YH to try to sell the property and to recover the investment.  
1382  
1383  
1384  
1385  
D-1312, p. 209.  
Goodman, November 23, 2009, pp. 196-197.  
Whiting, February 14, 2000, pp. 103-111.  
R. Smith, September 16, 2008, pp. 34–36.  
500-05-001686-946  
PAGE: 266  
[
1296] Plaintiff argues that the various letters of intent and offers for Meadowlark,  
received in the years 1988 to 1990, fell far short of the amount that would have been  
1
386  
For example, an evaluation of what Castor  
necessary for Castor to recover its loan.  
would have received if Meadowlark had been sold for $17.5 million, once the first  
mortgage was repaid and arrears and commissions were paid, amounts to almost  
nothing.1  
387  
[
1297] Plaintiff submits that not surprisingly Goodman relies on the second 1988  
Shaske appraisal to arrive at his “best estimate of market value” of $27 million without  
considering that the assumptions therein or other factual evidence demonstrate that this  
value was totally optimistic and utterly unsupportable. Plaintiff argues the evidence is  
clear that the proposed renovations that were assumed in this appraisal ($5 million)  
were not going to be done and that the occupancy assumptions were totally unrealistic  
and were not being met. It is evident that if the first mortgage loan was in jeopardy at  
that time, there was no reasonable assurance of collectability for the Castor loans which  
ranked below.  
[
1298] Plaintiff concludes that the value indicators that Goodman relied on are  
unrealistic, speculative and do not represent GAAP values or even attempt to reflect  
commercial reality.  
Defen d a n t s  
[
1299] Defendants plead that none of Plaintiff’s experts testified in chief with respect to  
Castor’s loans in connection with the Meadowlark project and that, as a result,  
Goodman’s conclusion that there was a surplus of $4.6 million is the only valid opinion  
on this project before the Court.  
[
1300] Defendants add that Goodman used market values and computed a security  
surplus of $4.6 million, in accordance with his 5-step methodology, supported by a letter  
of opinion and two earlier appraisals.  
Evidence  
1
388  
: 50% of that interest was held in  
[
1301] The YH Group held 100% of Meadowlark  
1
389  
.
YHDL; the other 50% was held in Raulino, part of Wersebe’s European Group  
1386  
1387  
1388  
1389  
PW-1112-14.  
PW-1112-17.  
D-1238, PW-1112-18, PW-1112F and PW-3033, vol 2. Tab F, p.4  
PW-1112F  
500-05-001686-946  
PAGE: 267  
Loa n s a s of Decem ber 3 1 , 1 9 8 8  
[
1302] As of December 31, 1988, Castor’s exposure to loans relating to the Meadowlark  
shopping center amounted to $7.7 million:  
nd  
•
•
Loan 1030, a 2 mortgage loan to Leeds Development (1981) Ltd.– $7 million.  
Loan 1117, a loan advanced in 1988 to Leeds Development (1981) Ltd. to cover  
operating expenses - $0.6 million.  
•
Accrued interests – $ 0.1 million.  
[
1303] Castor’s loans were subordinated to the $16.1 million first mortgage loan held by  
1390  
the Bank of Montreal . Castor’s loans to Leeds Development (1981) Ltd. were also  
secured by a guarantee provided by YHDL.  
In t er es t s r ecogn ized a s r even u e  
[
1304] During 1988, $0.9 million was recognized as revenue by Castor on loans relating  
1391  
.
to the Meadowlark shopping center  
Pr ior t o 1 9 8 8  
[
1305] At that time, the WEM was the largest shopping center in the world. Before the  
WEM was built, Meadowlark was a successful shopping center. However, after the  
WEM opened, approximately a mile away, Meadowlark suffered, and so did about every  
1
392  
.
other retail centre in Edmonton  
[
1306] From 1983 onwards, the property was struggling. Sears, the anchor tenant  
1393  
and had to be replaced.  
moved out  
[
1307] The TD Bank was paid off and Castor increased its loan exposure on the  
property up to approximately $22 million and took over all of the financing on the  
property1  
394  
.
1390  
1391  
1392  
1393  
1394  
PW-1112A  
PW-1112-G  
Ron Smith, September 16, 2008, p.30  
Ron Smith, September 16, 2008, p.31; Ron Smith, September 24, 2008, pp.78 and following  
Ron Smith, September 16, 2008, p.31  
500-05-001686-946  
PAGE: 268  
[
1308] By 1986, the Bank of Montreal chipped in and put a $15 million first mortgage on  
the property and Castor subordinated its position to end up with a $7 million  
exposure1  
395  
.
[
1309] There was no credit analysis performed by Castor in respect of the credit  
worthiness of the borrowers Leeds Development (1981) Ltd. and Raulino Canada Ltd.  
1
396  
.
All Castor relied on was their interest in the property  
1
9 8 8 Even t s  
[
1310] Prior to the 1988 year-end, due to unpaid municipal taxes, Meadowlark was  
notified that it was in default of one of the major terms of the BMO mortgage. At that  
time, YH did not have the resources to pay the outstanding taxes on the property  
without financing from Castor, and it was looking for a new $5 million loan from BMO to  
1
397  
carry out the merchandising and renovation program that the property required.  
[
1311] Moreover, the BMO was concerned about the impact on the value of the asset  
due to the significant decrease in occupancy, and further noted that the promised  
1
398  
upgrade program had not been carried out.  
[
1312] On October 3, 1988, BMO advised its borrower and Castor that taxes were in  
1399  
.
arrears and that the situation had to be corrected  
[
1313] By the end of 1988, the owners had made the decision to put the Meadowlark  
1400  
.
shopping center on a sale mode to try to recover their investment in the property  
[
1314] In January 1989, Castor was informed by YH that BMO had transferred the first  
mortgage loan to its work out group. According to the assessment of YH, Meadowlark  
1
401  
was «in extreme danger of complete disaster».  
[
1315] Efforts were made to try to recover $22 million from a sale of the property, but  
1402  
.
that never materialized  
Ap p r a is a ls  
1395  
1396  
1397  
1398  
1399  
1400  
1401  
1402  
Ron Smith, September 16, 2008, pp.32-33, 53  
Ron Smith, September 16, 2008, p.50  
PW-1112-8A.; Ron Smith, September 16, 2008, p. 34  
PW-1112-9.  
Ron Smith, September 16, 2008, pp.58-59  
Ron Smith, September 16, 2008, pp.34-35, 54-55  
PW-1112-10; Ron Smith, September 16, 2008, pp.63-66  
Ron Smith, September 16, 2008, pp.36 and following  
500-05-001686-946 PAGE: 269  
[
1316] On April 11, 1984, an appraisal indicated a value of $28.9 million1403  
.
[
1317] There was an appraisal prepared by Edward J. Shaske & Associates Ltd. dated  
1404  
July 2, 1986 for $20.5 million.  
[
1318] In 1988, two appraisal reports on the property were provided by Edward J.  
Shaske & Associates Ltd.  
•
•
The first appraisal dated March 14, 1988 provided an estimate of value of $21.0  
million and indicated: “At the present time, the shopping centre is affected by  
unoccupied bays, monthly tenancies, and uncertainty of continued operations by  
the owners”.1  
405  
Instructions to the appraiser had been provided by BMO.  
The later appraisal dated July 18, 1988 provided an estimate of value of $27  
million but indicated: «As the feasibility of continued operations is not our area of  
expertise, we have relied solely on the recommendations of the studies and have  
assumed that a complete “face-lift” or “retrofit” of the mall and site will occur in  
the immediate future … A progressive marketing and merchandising strategy is  
not only a must – but a necessity. ». For this second appraisal, instructions had  
been provided by YHDL and assumed the following : «the “retrofit” is completed  
1
406  
and full occupancy occurs over the course of a two-year time frame. »  
Exp er t s ’ evid en ce  
[
1319] Froese was aware that YHDL had an interest in Meadowlark and that Castor had  
a loan in connection with it, but he did not do any work on the collateral available for that  
loan1  
407  
.
[
1320] Rosen included a section on Meadowlark in his report and recommended a  
minimum loan loss provision of $7.0 million: Rosen assumed that Meadowlark was not  
worth more than the balances outstanding on the Bank of Montreal first mortgage and  
1
408  
other priority ranking creditors . Rosen said there was a difference between the total  
loan exposure to the property and what a decent appraisal would reveal as the  
value1  
409  
.
1403  
1404  
1405  
1406  
1407  
1408  
1409  
PW-1112H  
PW-1112I  
PW-1112J-1.  
PW-1112J, bates pp. 15-16.  
Froese, December 4, 2008, pp.155-156; January 8, 2009, pp.203-207  
PW-3033, vol.2, Tab F  
Rosen, March 26, 2009, p.200-201  
500-05-001686-946  
PAGE: 270  
[
1321] Goodman admitted that Meadowlark was “a shopping centre that was not  
1410 1411  
but, nevertheless, he concluded that there was a  
performing particularly well”  
1
412  
surplus of value available to Castor of $4.6 million . He characterized Rosen’s  
1
413  
approach as a distressed value approach.  
[
1322] Goodman concluded to such a surplus on the basis of an appraisal of $27 million  
which was taking into account major retrofit of the centre and full occupancy over the  
course of a two year time frame and he did not deduct the costs of those  
renovations1  
414  
.
[
1323] Goodman’s security enforcement plan was the following: Castor would probably  
have realized the value of its Meadowlark security by enforcing its security in respect of  
loan 1030 and by becoming the sole owner of Meadowlark. Thereafter, and provided  
Castor would have determined that it would not be worthwhile to renovate the centre  
given the competitive threat of the WEM, Castor would have sold the shopping centre to  
the highest bidder in the normal course of business, without the distressed restructuring  
circumstances facing YHDL. Throughout this process, Castor would service the  
mortgage of BMO.  
Conclusions  
[
1324] Defendants’ proposition that the Court should conclude that there was a surplus  
of $4.6 million by the mere fact that Goodman was the only expert to have opined in  
direct examination on the topic is ill-founded.  
[
1325] As it is the case for any witness, including expert witnesses, the Court must  
1415  
.
assess the credibility and the reliability of testimonies  
[
1326] Goodman’s opinion that there would have been a surplus lies on shaky ground  
and does not hold water: it is neither credible nor reliable. In the circumstances  
described above, computing from a property value of $27 million is totally unreasonable.  
[
1327] At best, the property value could have been enough to reimburse BMO and  
Castor but no one could have reasonably expected a surplus. In fact, Rosen might even  
have been right when he opined that a LLP was required in 1988.  
1410  
1411  
1412  
1413  
1414  
1415  
Goodman, November 30, 2009, p.202  
Goodman, September 24, 2009, pp.81-111  
D-1312, pp.251-265; Goodman, September 24, 2009, p.82  
Goodman, September 24, 2009, pp.88-97  
Goodman, November 30, 2009, p.204  
Royer, Jean-Claude, La preuve civile, 4 éd. Cowansville, (Qc), Yvon Blais, 2008, at §120, 484;  
Shawinigan Engineering Co. c. Naud, [1929] R.C.S. 341 at 343; Lapointe c. Hôpital Le Gardeur,  
[
1992] 1 R.C.S. 351 at 358; AZ-92111029; J.E. 92-302. Droit de la famille – 103252, [2010] QCCA  
2
173; AZ-50695343; P.L. c. Benchetrit [2010] QCCA 1505, para.25 to 31; AZ-50666756; J.E. 2010-  
600; L.F. c. A.D., AZ-50342156 at paras. 76, 81, 83, J.E. 2006-9, [2006] R.D.F. 175 (rés.).  
1
500-05-001686-946  
PAGE: 271  
1989 financial statements  
Some figures and notes content of the 1989 statements  
[1328] According to its balance sheet, Castor had:  
•
$1,424,051 of investments in mortgages, secured debentures and advances, as  
more fully disclosed in notes 2, 3, 4 and 10;  
•
$100 000 of liabilities through debentures, as more fully disclosed in note 6.  
[
1329] According to the consolidated net earnings statement, Castor’s revenues for  
1
989 were $197,711,000 as more fully disclosed in note 9, and Castor’s net earnings for  
989 were $28,410,000.  
1
[1330] According to note 10 on related party transactions:  
•
•
secured debentures and advances due from shareholders in the amount of  
9,076,000 were included in investments in mortgages, secured debentures and  
$
advances; and  
transactions during the year, and amounts due to or from shareholders and  
directors, not otherwise disclosed separately in the financial statements, were as  
follows:  
o accrued interests and other payables : $1,047,000  
o interest revenue : $1,338,000  
o other expenses: $357,000  
[
1331] Notes 2, 3, 4, 6 and 9 read as follows:  
2.  
Investments in mortgages, secured debentures and advances  
The investments in mortgages, secured debentures and advances are in various currencies and bear  
interest at varying rates from 7 1/2% to Canadian bank prime rate plus 6% per annum and mature as  
follows:  
1990  
1991  
1992  
1993  
1994  
1995  
1,055,702  
121,799  
84,253  
157,460  
4,416  
421  
and subsequent  
years  
—
———————  
—
—
500-05-001686-946  
PAGE: 272  
1,424,051  
3.  
Notes payable  
(
a) These notes are payable in various currencies and bear interest at varying rates from 6 ½% to  
5 15/16% and mature as follows:  
TOTAL  
1
1990  
1991  
1992  
1994  
Secured  
238,477  
406,996  
220,977  
328,838  
17,500  
7,000  
-
-
Unsecured  
60,158  
11,000  
—
————  
—
—————  
——-  
—————  
———  
—————  
——  
—————  
———-  
6
45,473  
549,815  
24,500  
60,158  
11,000  
(
b) Mortgages having an approximate book value of $236,587 have been pledged as security for  
the secured notes payable.  
4.  
Bank Loans and advances  
(a) Bank loans and advances consist of term loans and advances bearing interest at floating rates  
and varying fixed rates from 5 13/16% to 15 3/16% per annum.  
(b) The term loans mature as follows:  
TOTAL  
15,186  
1990  
1991  
1994  
5
375,993  
104,124  
35,069  
(
c) Mortgages having an approximate book value of $189,980 have been pledged as security for  
the bank loans totalling $188,482.  
6.  
Debentures  
1989  
1988  
(
a) Debentures maturing on June 30, 1997 bearing  
50,000  
50,000  
interest at The Royal Bank of Canada prime rate plus 2  
¼
% but not less than a minimum of 11% per annum.  
After June 30, 1992, the company has the right to prepay  
the principal amount. Interest on the debentures is  
payable semi-annually.  
(
b) Debentures maturing on June 30, 2002 bearing  
50,000  
50,000  
interest at The Royal Bank of Canada prime rate plus 2  
3
/8% but not less than a minimum of 11% per annum.  
After June 30, 1994, the company has the right to prepay  
the principal amount. Interest on the debentures is  
payable semi-annually.  
—
————————  
———————  
500-05-001686-946  
PAGE: 273  
—
——-  
———-  
100,000  
1
00,000  
9.  
Revenue  
Details of revenue are as follows:  
1989  
1988  
Interest and discounts  
Commissions  
183,793  
13,579  
339  
117,366  
14,689  
355  
Share of revenue from  
investments and joint ventures  
—
—————————  
———————————-  
132,410  
—
——-  
1
97,711  
Materially misstated (1989)  
[1332] The 1989 statements were materially misstated.  
Absence of a SCFP showing the sources and uses of cash and cash  
equivalents  
[
1333] A SCFP was required: section 1540 and its italicized recommendations were  
clear.  
[
1334] The analysis developed and the conclusions enunciated in the 1988 financial  
statements section of the present judgment apply mutatis mutandis.  
Undisclosed related party transactions  
[
1335] No doubt related party transactions were undisclosed in the 1989 financial  
statements. The analysis developed and the conclusions enunciated in the 1988  
financial statements section of the present judgment apply mutatis mutandis.  
[
1336] Over and above the situations discussed in the 1988 section, two other  
transactions which took place in 1989 raise conclusive or potential undisclosed related  
party transactions: a loan made through Global management in trust for the benefit of  
1
66505 Canada Inc., and the purchase of an airplane by Jet lease 900 and the charter  
agreement of such airplane with Castor.  
1
66505 Canada Inc.  
500-05-001686-946  
PAGE: 274  
[
1337] On May 26, 1989, CHIF, represented by Stolzenberg, instructed Global  
Management Ltd. (“Global”), represented by Bänziger, to make a loan on its behalf to  
1
66505 Canada Inc. (“166505”) in the amount of $8,691,375. 1416  
[
1338] By a loan agreement dated May 26, 1989, Global, represented by Bänziger  
loaned to 166505, represented by Stolzenberg, $8,691,375. In their agreement, Global  
and 166505 stipulated that the interest was payable monthly and they stated that the  
purpose for the loan was as follows: “for the purpose of the acquisition of a participation  
in Perkins Paper”1  
417  
.
1418  
[
1339] Previously, Wightman had introduced Stolzenberg to Perkins Paper , one of  
Wightman’s audit clients - a situation discussed later under the subheading  
“
independence”. Stolzenberg invested in Perkins Paper, through 166505, and with  
1419  
.
Castor’s money  
[
1340] Castor’s records clearly disclosed that the proceeds of the $8,691,375 loan were  
1420  
.
disbursed to “Phillips and Vineberg in trust” for the benefit of 166505  
[
1341] At year-end the loan balance was $9,527,407, and all interest accrued on the  
loan during the year, in the amount of $836,032, was capitalized to the loan and  
recognized as revenue1  
421  
.
[
[
1342] In her working papers, Ford indicated that no loan file existed.1422  
1343] The loan was not disclosed as a related party transaction and it should have  
1
423  
1424  
been , a fact that Defendants’ expert Selman acknowledged.  
Jet lease 900  
[
1344] Jet lease 900 (“Jet lease”) owned an aircraft which was purchased with a  
financing from Banque Paribas. Castor chartered the airplane. Wightman knew about  
these transactions: he was involved in structuring them.1425  
[
1345] In 1989, Castor made a $6 million deposit in connection with this charter  
agreement and set the amount as a prepaid expense in its books and records.  
1416  
1417  
1418  
1419  
1420  
1421  
1422  
1423  
1424  
1425  
PW-2285  
PW-2285, bates 005317  
Wightman, September 5, 1995 p.71  
Wightman, September 5, 1995, pp.71-81  
PW-696  
PW-1053-89-4A, seq. p. 250  
PW-1053-89, sequential p. 263.  
Vance, March 12, 2008, pp.31 and following  
Selman, May 14, 2009, pp.19-20; Selman, June 9, 2009, pp.245-247  
Vance, June 4, 2008, pp.87-90  
500-05-001686-946  
PAGE: 275  
[
1346] Vance opined that the Jet lease transactions were related party transactions  
1426  
because Stolzenberg was the beneficial owner of Jet Lease , a fact that he derived  
from a declaration of Gourdeau, the trustee, and from the content of the examination of  
1
427  
.
Stolzenberg under section 163 of the Bankruptcy act  
[
1347] Assuming that Stolzenberg beneficially owned the shares of Jet Lease or  
significantly influenced Jet lease, and assuming that there would have been a residual  
value after the reimbursement of the loan to Banque Paribas, the transaction should  
1
428  
.
have been disclosed as a related party transaction: Selman agreed  
[
1348] No conclusion can be drawn, however, since the declaration of Gourdeau is not  
evidence before this Court and since the examination of Stolzenberg under section 163  
of the Bankruptcy Act is not part of the court record.  
Artificial improvements of liquidity and undisclosed restricted cash  
[
1349] Castor’s liquidity was artificially improved in the 1989 consolidated audited  
financial statements as a result of the following elements:  
•
•
•
the maturities used in notes 2, 3 and 4;  
the 100 million debenture transaction;  
the undisclosed restricted cash in the amount of £18.8M ($42 million).  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Pla in t iff  
[
1350] Plaintiff argues that :  
•
The Notes 2, 3 and 4 to the 1989 consolidated audited financial statements were  
materially misleading and disclosed a false picture of liquidity matching and  
solvency.  
•
The maturity notes conveyed to the reader that there was good maturity  
matching but in reality, it was the opposite. There was no reasonable expectation  
that the loans included as “current” would be, or could be, repaid during the  
current year.  
1426  
1427  
1428  
Vance, March 12, 2008; Vance, June 4, 2008, p.83  
Vance, June 4, 2008, pp.83 and following  
Selman, May 14, 2009 p.21  
500-05-001686-946  
PAGE: 276  
•
The maturity dates of various assets (loans receivable) and liabilities (loans  
payable) were altered during the audit; changes, unsupported by audit evidence,  
were accepted by C&L to the maturity dates. By advancing the due date of  
various receivables before their actual due dates and by extending the due date  
of various liabilities beyond their actual due dates, Castor improved its apparent  
liquidity position.  
Defen d a n t s  
[1351] Defendants plead that:  
•
Plaintiffs’ experts misread the notes to the financial statements.  
o Vance and Rosen have asserted that these notes were misleading  
because they were possibly incorrect with respect to the amounts shown  
as maturing in future years, and because they misled the reader into  
believing that Castor was going to receive as much as 70-80% of its  
revenue in cash within the next year, whereas in reality, Castor’s assets  
were not that liquid.  
o Rosen described the mismatch as being between long-term lending and  
short-term borrowing.  
•
•
Plaintiffs’ experts are attempting to read something into the financial statement  
notes that is not there, nor required to be there. Rosen and Vance confused the  
concepts of “maturity” and “liquidity”.  
Plaintiffs failed to demonstrate that the disclosures as to contractual maturity  
dates made in the 1989 financial statements were not materially correct.  
Maturity changes made in 1989  
[
1352] Changes were made to maturity dates. These changes were made by C&L  
during the audit work in the field or, at Castor’s suggestion, after the audit work in the  
field was completed. Those changes concerned loans and notes payable totalling $145  
million. 1  
429  
•
CHL’s bank loans originally inscribed as maturing in 1990 were reclassified to  
mature in 1991:  
o Société Générale (Canada) - $6.8 million1430  
o Banque Nationale de Paris (“BNP”) - $2.4 million1431  
1
429  
430  
PW-2908, vol. 1 chapter 4, pages 4F-23 and following; Vance, March 12, 2008, pp.133 and following  
PW-1053-18-3, BB100  
1
500-05-001686-946  
PAGE: 277  
o BNP- $2.4 million1432  
o Crédit Commercial de France (“CCF”) – $966,0001433  
o CCF- $1.9 million1434  
o CCF - $6.2 million1435  
o CCF - $2.9 million1436  
o Caisse Centrale Desjardins - $10 million1437  
o Caisse Centrale Desjardins - $7.5 million1438  
o Caisse Centrale Desjardins -$7 million1439  
•
•
CHIF’s bank loans originally inscribed as maturing in 1990 were reclassified to  
mature in 1991:  
o DG Bank L.A. - US $10 million1440  
o DSL Bank, Boon – DEM 20 million1441  
Notes payable by CHIF, originally inscribed as maturing in 1990, were reclassified  
to mature in 1992 or in subsequent years:  
o Bristol Equity Holdings – $60.1 million1442 – new maturity 1992  
o Tara - $4 million – new maturity 1994  
o Tara - $5 million – new maturity 1994  
o Tara - $ 2 million – new maturity 1994  
Specific additional evidence  
1431  
1432  
1433  
1434  
1435  
1436  
1437  
1438  
1439  
1440  
1441  
1442  
PW-1053-18-3, BB101  
PW-1053-18-3, BB101  
PW-1053-18-3, BB101  
PW-1053-18-3, BB101  
PW-1053-18-3, BB101  
PW-1053-18-3, BB101  
PW-1053-18-3, BB143  
PW-1053-18-3, BB143  
PW-1053-18-3, BB163A  
PW-1053-90-5A, sequential page 96  
PW-1053-90-5A, sequential pages 64 and 71  
PW-1053-90-5A, sequential. p. 102  
500-05-001686-946  
PAGE: 278  
CHL ba n k loa n s  
[
1353] Castor maintained a ledger which captured information on each deposit or each  
loan drawdown: the identity of the lender, the term, the maturity date, the rate of interest  
1
443  
.
and the amount of interest due on maturity  
[
1354] “B.A.” and “P.N.” inscriptions on Castor maturity listings stand for Bankers  
1444  
.
Acceptance and Promissory Note  
[
1355] Castor had to repay Bankers Acceptance and Promissory Notes at their  
1445  
even though they had been issued within an evergreen  
respective maturity dates  
credit facility. Credit facility maturities and Bankers Acceptance or Promissory Notes  
1
446  
maturities were two different things . Credit facility could run for several years but  
their terms sometimes indicated that individual borrowings were limited to a specified  
term, such as 60, 90, 180 or 360 days.  
[
1356] Placement cards for all of these loans indicated a maturity date of 1990 and, for  
1447  
.
all of them, bank confirmations received by C&L showed a 1990 maturity date  
[
1357] When there was a Bankers Acceptance or a Promissory Note, the inscription  
relating to maturity on the placement cards was the Bankers Acceptance or the  
Promissory Note maturity. When there was neither a Bankers Acceptance nor a  
Promissory Note, the inscription relating to maturity on the placement card was the date  
of the next interest payment1  
448  
.
[
[
1358] Loans by Société Générale, BNP and CCF were Bankers Acceptance.  
1359] Loans by Caisse Centrale Desjardins were made through a Promissory Note.  
1360] During his field work at CHL’s office, Joron noticed that a maturity date as shown  
[
1
449  
was not always the maturity date appearing in the applicable  
on a placement card  
1
450  
.
commitment letter, and he noted his observation in the AWPs  
[
1361] In various situations, faced with different maturity dates, but without any further  
steps taken, Joron relied on the maturity date of the credit facility appearing in the  
commitment letters and not on the information appearing on the placement cards and  
the confirmation letters.  
1
1
1
1
1
443  
444  
445  
446  
447  
Simon, April 23, 2009, p.144  
Simon, April 28,2009, pp.220-221 ; PW-1053-18-3  
Simon, April 28,2009, p.233  
Simon, April 28, 2009, p.245  
PW-1053-18, sequential pages 148-149 (BNP), 150 -154 (CCF), 168 (Société Générale), 187-188  
(
Caisse Centrale Desjardins)  
1448  
1449  
1450  
Simon, April 28,2009, p.234  
PW-167  
PW-1053-18-3, BB-99A  
500-05-001686-946  
PAGE: 279  
1451  
1362] The January 20, 1989 commitment letter of Société Générale , and the  
1452  
that superseded it, gave Castor possibilities to  
[
October 25, 1989 commitment letter  
borrow under Bankers Acceptance through an operating line of credit or through the  
evergreen facility. The operating line was granted for a short period (May 31, 1989 and  
May 31, 1990) renewable at the bank’s discretion and the evergreen facility was granted  
for a basic term of 2 years.  
[
1363] By a commitment letter dated October 6, 19891453, BNP granted a revolving  
credit of $5 million to Castor for a term of 2 years, renewable every year at BNP’s sole  
discretion. This credit was available by way of Bankers Acceptance or by way of direct  
advances. In case of an event of default, Castor and BNP had stipulated that Castor’s  
right to make further borrowings would immediately terminate.  
[
1364] By a commitment letter dated September 27, 1989, CCF provided two credit  
facilities to Castor: a 2 year revolving evergreen facility (facility A) and a demand  
1
454  
operating facility (facility B) .The facilities were available through draws in a minimum  
amount of $500,000 by way of direct advances or Bankers Acceptance limited to 90  
days and subject to availability. Facility A was to be 100% secured and was subject to  
CCF’s and its solicitors’ approval of the guarantees to be provided, on a case by case  
basis.  
[
1365] On November 24, 1989, for the purpose of its own audit, CCF sent an audit  
confirmation request to Castor. This confirmation request listed the four Bankers’  
1
455  
.
Acceptance as maturing in 1990 and Stolzenberg confirmed them as correct  
[
1366] By a commitment letter dated May 2, 1989, Caisse Centrale Desjardins extended  
to Castor a credit facility known as “Credit A” for a total amount of $13 million. $7.5  
million of that facility were dedicated to MLV and $5.5 million remained undrawn at that  
1
456  
date . It was agreed that Credit A would take the form of revolving loans for an initial  
period of 2 years – that Castor would retain the option to borrow, repay and re-borrow-  
and that such loans would be evidenced by either floating rate notes or term notes for  
periods of 7 to 365 days depending on the availability of funds and provided that the  
terms were within the credit period. The “drawdown/repayment procedures” paragraph  
included the following restriction to repayment: “No prepayment will be accepted before  
maturity of a term note”. The clause “events of default” included the following:  
“
immediately and without notice if the Borrower fails to pay the principal amount of the  
loans when due and payable or to pay interest on the loans when due and payable”.  
1451  
1452  
1453  
1454  
1455  
1456  
D-565  
D-566-1  
D-561  
D-571  
PW-2412  
D-570  
500-05-001686-946 PAGE: 280  
1
457  
[
1367] Castor also had evergreen credit facilities with Caisse Centrale Desjardins  
and transactions within such facilities were registered on a placement card, which was  
1
458  
.
part of Castor’s books and records  
CHIF ba n k loa n s  
[
1368] These loans appeared on the CHIF maturity list1459 which indicated a 1990  
maturity date.  
[
1369] DG bank answered the request confirmation as follows: “We have checked our  
1460  
No follow up was  
records and do not show this item. Please recheck your records.”  
done.  
1
461  
[
1370] DSL bank confirmed that the amount was due in 1990 . CHIF’s records, in  
addition to the confirmation from DSL, also consistently show that the amounts were  
1
462  
.
loaned on a short-term basis and matured in 1990  
[
1371] The loans made under the revolving credit agreement signed with DSL were  
1463  
loans for a period of 360 days . Provided it was not in default, CHIF, upon the  
expiration of a loan, was allowed from time to time to choose to continue an outstanding  
1
464  
loan by giving an irrevocable notice of continuation . Notwithstanding the maturity  
date of the credit facility, payment of principal for each outstanding loan was due and  
payable upon its expiration, unless CHIF had chosen to extend the loan and had given  
proper notice1  
465  
.
[
1372] Gross told C&L that all loans were of current nature, as noted by C&L in their  
1466 1467  
.
AWPs . Gross testified accordingly  
Not es p a ya ble  
[
1373] In a letter dated February 8, 1990, Bänziger asked for changes to maturity dates  
1468  
Aware of that request, Ford asked Bänziger, in writing, to provide  
to notes payable.  
1457  
1458  
1459  
1460  
1461  
1462  
1463  
1464  
1465  
1466  
1467  
1468  
D-567-1  
Simon, April 28, 2009, p.245 ; PW-2485-1  
PW-1053-90-5A  
PW-1133A as bates #1784  
PW-1133A as bates #1789  
Gross, February 1-5, 1999, pp.779-785  
D-333-1, article 2.1 A  
D-333-1, article 2.1 C  
D-333-1, article 2.4 A  
PW-1053-90-6, CC-2  
Gross, February 1-5, 1999, pp.779 to 788  
PW-1053-72-15  
500-05-001686-946  
PAGE: 281  
her with further information1469. Ford’s request went unanswered, but the changes were  
made nevertheless by C&L.  
[
1374] Confirmations had been sent to all lenders, including Bristol and Tara, indicating  
the original maturity dates. Bristol returned a signed confirmation, but Tara did not.  
[
1375] The Bristol note is shown as maturing in 1990 on the maturity listing1470. In its  
answer to the confirmation request, signed by Bänziger on its behalf, Bristol confirmed a  
1471  
990 maturity date . However, in his letter of February 8, 1990 requesting changes,  
1
Bänziger stated that the Bristol deposit was connected to a receivable from Marketchief  
maturing only in 1992 and that, consequently, it could not be called for earlier.  
[
1376] Tara was a name under which members of the White family interacted with  
Castor for investments.  
1
472  
with a maturity date set  
[
1377] On the maturity listing, the Tara notes were shown  
out as 99.99.99, i.e. without a maturity date and due on demand. The maturity date  
appearing on the copy of the confirmation request was December 31, 1989, the fiscal  
year-end 1  
473  
.
[
1378] All documentation in the Tara deposit folders, since the inception of the deposits,  
refers to “call deposits”, deposits due on demand.  
[
1379] In his letter of February 8, 1990 requesting changes, Bänziger wrote that the  
1474  
.
Tara deposits were included under demand notes for technical reasons  
[
1380] Gross observed that the Tara notes that he was shown were not drawn in the  
1475  
usual Castor format.  
[
1381] In the AWPs, C&L wrote that all notes payable were of a current nature as per  
1476  
.
Gross, i.e. maturing in 1990  
Experts’ opinions – Maturity notes 2, 3 and 4  
[
1382] Vance indicated that the fiscal year-end as a maturity date would indicate a debt  
payable on demand, and that such was the case for the Tara notes.  
1469  
1470  
1471  
1472  
1473  
1474  
1475  
1476  
PW-1053-72-16  
PW-1053-90-5A  
PW-1133A as bates # 1692  
PW-1053-90-5A at seq. p. 124  
PW-1053-73-1  
PW-1053-72-15  
Gross rogatory commission at pp.588-590  
PW-1053-90-4, AA-50  
500-05-001686-946  
PAGE: 282  
1
477  
:
[
1383] Vance opined that all the above maturity date changes were wrongly made  
no changes could be made without sufficient appropriate evidence, which evidence C&L  
did not have; dates, as confirmed by banks or other lenders through the confirmation  
process used by C&L, should not have been altered.  
[
1384] In the case of the Bristol deposit, Vance acknowledged there was obviously a  
mismatch in maturities. Without a proper legal opinion on hand, C&L could not assume  
that Castor had a right to offset. At maturity, Castor would have or could have required  
other security from the borrower.  
1
478  
[
1385] Except for a $2,500,000 portion owed under the CCF demand facility  
and the  
1479  
$
10 million loan from Caisse Centrale Desjardins , Selman opined that there was a  
reasonable basis for changing the maturity dates made to loans owed by Castor and  
identified by Vance. In the case of the two exceptions, Selman opined that the maturity  
table, as revised with C&L’s consent, was wrongly stated.  
[
1386] In evergreen facilities, Selman opined that the shorter term was only used to  
1480  
and that the facilities  
create an opportunity for banks to change the interest rate  
expiration dates could be used as maturity dates for the purposes of notes 2, 3 and 4.  
1
481  
:
His analysis rests on the following articulated facts  
•
•
Banks committed to facilities that would remain in place as long as Castor  
met covenants agreed to in the commitment letters.  
As long as Castor met its covenants, Banks could not otherwise justify a  
demand for repayment.  
•
•
Banks were bound to renew if Castor chose to renew.  
Obviously, Castor would renew if it was in its interest to do so.  
[
1387] Therefore, as long as the changes of maturity dates remained within the  
expiration of the facility, Selman opined it could be done – it was in accordance with  
GAAP.  
[
1388] In the Bristol case, Selman opined that the available agreements were not  
1482  
for C&L to require a legal opinion before accepting the right to  
sufficiently unclear  
offset.  
1477  
1478  
1479  
1480  
1481  
1482  
PW-2908, vol. 1 chapter 4, pages 4F-23 and following; Vance, March 12, 2008, pp.133 and following  
D-1295, p.306  
Selman, May 21, 2009, pp.104-110  
Selman, May 21, 2009, pp.83-85  
Selman, May 21, 2009, pp.81-82  
PW-2214-A and PW-2115  
500-05-001686-946  
PAGE: 283  
[
1389] In the case of the Tara notes, unless the notes shown to Gross were not signed  
1483  
notes in the hands of the White , Selman was not prepared to accept that their 1994  
maturity dates were wrong.  
Conclusions  
[
1390] There is no quarrel between experts that the due dates on the Bankers  
Acceptance and the Promissory Notes were shorter in term than the expiration dates of  
the credit facilities.  
[
1391] The due dates on the Bankers Acceptance and the Promissory Notes, confirmed  
as correct by financial institutions through the audit confirmation process, should not  
have been changed without further appropriate audit evidence. Castor had rights to  
renew Bankers Acceptance or Promissory Notes under its evergreen credit facilities but  
those rights were conditional to compliance with all covenants at renewal specific dates.  
[
1392] Given Castor’s global situation, including the purposes and the content of notes  
, 3 and 4, Vance’s opinions prevail. The analysis developed and the conclusions  
2
enunciated on this topic in the 1988 financial statements section of this judgment apply  
mutatis mutandis.  
Liquidity improvements (100 million debentures)  
[
1393] In 1989, Revenue Canada audited Castor’s $4 million payment to Gambazzi in  
the context of the issuance of the $100 million debentures. Relying on information from  
Wightman and Castor employees, Marcinski of C&L presented Castor’s position,  
1
484  
.
asserting the validity of the transaction  
[
1394] The analysis developed and the conclusions enunciated on this topic in the 1988  
financial statements section of this judgment apply mutatis mutandis.  
Undisclosed restricted cash  
[
1395] Castor had an unclassified balance sheet in its 1989 financial statements which  
included the heading “Cash in bank and short-term deposits”.  
1
483  
484  
D-327 and D-329  
1
Marcinski, January. 10, 1996, pp.163-188  
500-05-001686-946  
PAGE: 284  
[
1396] GAAP required that «cash subject to restrictions that prevent its use for current  
1485  
purposes» be excluded from current assets.  
[
1397] Without any note disclosure, a reader of the financial statements would assume  
that the amount shown under the heading “Cash in bank and short-term deposits” was  
1
486  
available and usable for general purposes . It was not the case.  
Positions (in a nutshell)  
Pla in t iff  
[1398] Plaintiff argues £18.8M of restricted cash should have been disclosed.  
[
1399] Moreover, plaintiff adds that had it been discovered that Castor had signed an  
unenforceable pledge under Irish law, management’s good faith would have been  
questioned.  
Defen d a n t s  
[
1400] Defendants acknowledge that a pledge of a deposit ought to be disclosed if it is  
material under GAAP.  
[
1401] However, given the ruling of the Irish Court that the pledge was unenforceable,  
Defendants submit it should not have been disclosed as restricted cash.  
[
1402] Subsidiarily, Defendants argue that the restriction would not have been material  
to the financial statements audited by C&L, even if it had been enforceable, since it  
represented only about 3% of Castor’s consolidated assets.  
Evidence  
[
1403] In December 1989, Castor set up a loan with Credit Suisse Canada for £18.8  
1487  
million (pounds sterling) to finance the incorporation of its subsidiary CHI .The loan  
facility referred to its security as “a payment obligation issued by Credit Suisse Zurich in  
1
488  
.
favour of Credit Suisse Canada”  
1485  
1486  
1487  
1488  
PW-1419-2, section 3000 “cash”  
PW-1419-2, section 3000; Vance, March 13, 2008, p.29.  
PW-511  
PW-511  
500-05-001686-946  
PAGE: 285  
1489  
1404] Castor used the proceeds of the loan to pay for the CHI shares issued to it  
[
and such payment was deposited at Credit Suisse Zurich. A pledge of funds deposited  
at Credit Suisse Zurich was signed by Stolzenberg to secure the loan of Credit Suisse  
Canada.  
[
1405] Credit Suisse Canada confirmed to C&L the term loan with a due date in 1994  
1490  
.
and its security “payment obligation from Credit Suisse Zurich”  
1
491  
[
1406] No confirmation was requested from Credit Suisse Zurich  
but the European  
AWPs of C&L included information on a guarantee (number 54-200) in the amount of  
£
18.8 million in favour of Credit Suisse Canada Toronto and information on the charged  
1492  
.
fee for such guarantee, in the amount of £14.1 pounds sterling  
1
493  
[
1407] The next year, for the 1990 audit, a bank confirmation  
was requested and  
received by C&L Ireland: the confirmation dated February 4, 1991 showed, on its last  
1
494  
.
page, that the £18.8 million fiduciary deposit was fully pledged  
[
1408] According to Cunningham, an Irish partner of C&L who audited CHI, the pledge  
1495  
.
was illegal under the Irish Companies Act  
1
496  
[
1409] On December 12, 1997 , the Irish High Court held that a pledge to secure a  
1
497  
existed since inception, but  
£
18.8 million loan of CHL from Credit Suisse Canada  
that such pledge was unenforceable under Irish law.  
Experts’ evidence  
[
1410] Vance opined that restricted cash in the amount of £18.8M ($42 million) was not  
1498  
.
disclosed  
[
1411] Asked what an auditor would have done had he been made aware of the  
unenforceability of the pledge because of its illegality under the Irish Companies Act,  
Vance answered that the auditor would have found that his client was engaging into  
illegal acts, and would have moved to the appropriate section of GAAP and GAAS to  
deal with such a situation.  
1489  
1490  
1491  
1492  
1493  
1494  
1495  
1496  
1497  
1498  
PW-534  
PW-1053-18-10, sequential page 33  
Vance, June 6, 2008, p.15  
PW-1053-72-19, sequential page 205; Vance June 6, 2008, pp.15 and following  
PW-546  
D-582  
Cunningham, November 26, 1998, p.80  
D-582  
D-582, namely pp. 13, 19 - 20  
PW-2908, Vol. 1, p. 4-F-56  
500-05-001686-946  
PAGE: 286  
Again, that's going into the legal round. What an auditor would do in the normal  
course, a competent auditor would determine that the bank thinks it's pledged  
and then you would say "We're going to have to disclose it as pledged" and the  
client "Winkwink, notch-notch, we did it but we know under Irish law, it's  
unenforceable", now the auditors got a bigger problem because his client is  
engaging in technically illegal acts, and we have sections in the handbook when  
you find your client entering into illegal act...1  
499  
[
1412] At the end of the day, Vance opined that under GAAP, the amount had to be  
disclosed as restricted cash, in the absence of a decision by a court of law that it was  
unenforceable1  
500  
.
[
1413] Selman opined that the cash related to Credit Suisse indebtedness for the 1989  
audit may not actually have been restricted cash because of the unenforceability of the  
pledge under the Irish law1  
501  
.
Conclusions  
[
1414] No evidence shows that Castor would have been aware of the unenforceability of  
the £18.8million pledge granted to Credit Suisse Zurich. The pledge was declared  
unenforceable in 1997, but until then it had been signed by Castor and it had been  
acted upon by Castor and its lenders.  
[1415] Therefore £18.8millin should have been disclosed as restricted cash.  
Undisclosed Capitalised interests and inappropriate revenue recognition  
[
1416] The analysis developed and the conclusions enunciated on this topic in the 1988  
financial statements section of this judgment apply mutatis mutandis.  
Understatement of LLP and overstatement of carrying value of Castor’s  
loan portfolio and equity  
[
1417] In 1989, Castor represented a carrying value of loans (investments in mortgages,  
secured debentures and advances) of $1,424,051 in its audited financial statements: it  
represented that the figure of $1,424,051 was the lower of estimated realizable value  
and cost.  
[
1418] At December 31, 1989, could the carrying value of loans, at the lower of  
estimated realizable value and cost, be $1,424,051 or an amount close enough to  
$
1,424,051 to avoid a material misstatement?  
1
1
1
499  
Vance, June 6, 2008, p.47  
500  
Vance, June 6, 2008, p.49-50  
D-1295, p. 328  
501  
500-05-001686-946  
PAGE: 287  
[
1419] Taking account of the facts as they unfolded, viewed and analysed in the context  
of the relationship that existed between Castor and YH, the obvious conclusion is that  
the carrying value of loans could not be $1,424,051 or an amount close enough to  
$
1,424,051 to avoid a material misstatement.  
[
1420] The task of assessing the exact quantum of any LLP that might have been  
required for 1989 is neither achievable nor necessary. This litigation is not about what  
the precise content Castor’s financial statements for 1989 should have been – it is  
about whether or not C&L’s 1989 audited financial statements of Castor presented fairly  
the financial position of Castor in accordance with GAAP, as they purported to do.  
Positions in a nutshell  
[
1421] Plaintiff and Defendants positions, summed-up in the 1988 audited financial  
statements section of the present judgment, apply mutatis mutandis.  
[
1422] Plaintiff argues that a minimum LLP of $185.1 million1502 should have been  
taken.  
[1423] Defendants argue that there was no need for a LLP.  
Experts’ figures  
[
1424] All plaintiff’s experts opine that LLP should have been taken in 1989, the lowest  
minimum LLP assessment being in the amount of $185.1 million as per calculations of  
Froese.  
[1425] Vance proposes a total minimum LLP of 243.8 million, breaking down as follows:  
Project/Category  
Vance’s proposed minimum LLP  
60 million  
MLV  
YH Corporate loans  
111.1 million  
MEC  
TSH  
CHS  
OSH  
20.9 million  
29.3 million  
18 million  
14.5 million  
1502  
PW-2941-4 - Minimum figure calculated by Froese  
500-05-001686-946  
PAGE: 288  
[
1426] Rosen proposes LLP ranges between 321.9 million and 457.9 million, breaking  
1503  
:
down as follows  
Project/Category  
Approach A - Approach A-  
Approach B- Approach B-  
Low  
High  
Low  
High  
MLV  
50 million  
113 million  
45.8 million  
24.9 million  
12.2 million  
69 million  
7 million  
64.9 million  
157 million  
53.1 million  
28.9 million  
22.8 million  
73 million  
80 million  
113 million  
45.8 million  
44.9 million  
22.2 million  
69 million  
7 million  
85 million  
157 million  
53.1 million  
48.9 million  
32.8 million  
73 million  
8.1 million  
YH Corporate loans  
MEC  
TSH  
CSH  
TWTC  
Meadowlark  
8.1 million  
[
1427] Froese proposes LLP ranged between 185.1 and 230.9 million, breaking down  
1504  
:
as follows  
Project/Category  
Low  
High  
MLV  
YH Corporate loans  
MEC  
52.2 million  
87.8 million  
1.4 million  
12.7 million  
31 million  
52.2 million  
93.9 million  
27.4 million  
26.4 million  
31 million  
CHS  
THS  
[
1428] Goodman opines that no LLPs were needed.  
1429] Goodman applied his 5 step methodology (previously described).  
[
1
503  
504  
PW-3033, volume 2  
1
PW-2941-4; PW-2941, volume 1, p. 25  
500-05-001686-946  
PAGE: 289  
[
1430] Again, the more serious dispute between Plaintiff’s’ experts and Goodman is with  
respect to the value used for step 1 and the proper application of step 5 under GAAP,  
given Castor’s reality and the realities of Castor’s borrowers.  
Analysis and Conclusions  
[
1431] The loans looked at by experts are largely the same but Plaintiff’s experts and  
Goodman used different groupings depending on the conclusions they reached as to  
the ownership of some properties or entities.  
[
1432] The discussion of the LLP issue is done, in light of the burden of proof that rests  
on Plaintiff, by using Plaintiff experts’ groupings and the following sub-headings: MLV,  
YH Corporate loans, MEC, TSH, CSH, OSH, TWTC and Meadowlark.  
MLV  
Experts’ positions  
[
1433] Plaintiff’s experts opined that LLPs were required for MLV, the proposed  
minimum LLPs being:  
•
•
•
60 million, according to Vance.  
52.2 million, according to Froese.  
54.4 million, according to Rosen.  
[1434] Goodman opined that no LLPs were needed for MLV.  
Additional evidence specific to MLV  
1
9 8 9 Even t s  
[
1435] The renovations that were contemplated since 1983 had not yet been  
1505  
.
completed  
[
[
1436] The MLV hotels lost the Sheraton brand1506  
.
1437] National Bank and FICAN were upset over December 1988 and January 1989  
1
507  
interest payments being past due . Counsel for Mellon had requested a mortgage  
statement from the National Bank and FICAN but YHHL thought it was not prudent to  
show Mellon that MLV’s accounts were almost 90 days in arrears. YHHL asked Castor  
1505  
1506  
1507  
Prychidny, October 14, 2008, pp.37-38  
Prychidny, October 14, 2008, pp.36-38  
PW-1070F (tab #10); PW-1070F-6 (Tab # 11)  
500-05-001686-946 PAGE: 290  
to provide an advance to MLVII of $572,279 so it could pay arrears before the interests  
1
508  
.
of February became due and obtain clean statements  
[
1438] On February 28, 1989, Castor transferred $282,545.40 to pay the December  
1509  
.
interest payments of National Bank and FICAN  
[
1439] In March 1989, National Bank and FICAN continued to exercise pressure for  
1510  
and Castor issued a check to MLVII to allow it to pay one more month of  
payment  
interests on the National Bank and FICAN loans and prevent these loans from being 90  
days in arrears.1 A similar scenario took place every month, thereafter  
1512  
.
511  
[
1440] On April 11, 1989, Prychidny wrote to Wersebe and Stolzenberg “MLV  
desperately requires cash funding or faces various disconnect notices with respect to its  
utilities” and “ As we all know, the property loses approximate $100,000 per month  
1
513  
before debt service during the off-season”.  
[
1441] In a letter dated May 9, 1989, Ron Smith mentioned to YHHL that Castor’s  
preferred position was to sell the properties as soon as possible, if a decent price could  
be achieved. Ron Smith wrote “considering that MLV is totally over-leveraged, we want  
to minimize the amount of funding that we put in forward, especially any unsecured  
1
514  
In his letter, Ron Smith also stated that “the tough part is we know the MLV  
portion”.  
income projections are weak and most probably not attainable”.  
[
1442] Through a letter of its solicitors, FICAN advised Castor that it intended to  
proceed with an application to the Supreme Court of Ontario for an order appointing a  
1
515  
.
receiver and manager of MLVII  
1443] The Mellon Bank refinancing did not take place.  
1
516  
[
On August 21, 1989 Mellon  
provided formal notice to YHHL that the expired commitment to provide financing for the  
MLV complex was withdrawn1  
517  
.
[
1444] Cash was removed from the hotel without authorization1518  
.
1
1
1
1
1
508  
509  
510  
511  
512  
PW-481F  
PW-1070F-7  
PW-1070F-9  
PW-1070F-10  
See for example: PW-1070F-11, PW-1070F-12, PW-1070F-13, PW-1070F-14, PW-1070F-15, PW-  
1
070F-16, PW-1070F-17, PW-1070F-23, PW-1070F-24. See also PW-1070-H and PW-1070H-1  
1513  
1514  
1515  
1516  
1517  
1518  
PW-488  
PW-492F-1  
PW-1070F-18  
PW-492A  
PW-492C  
PW-489  
500-05-001686-946  
PAGE: 291  
[
1445] On September 8, 1989, FICAN filled its motion before the Supreme Court of  
1
519  
Ontario to have C&L appointed as receiver to MLVII . Stolzenberg was upset that  
1
520  
.
C&L could be appointed receiver of MLV  
[
1446] On September 12, 1989, FICAN consented to withdraw its motion and to  
postpone any further similar action until November 15, 1989 to allow a refinancing to go  
through, subject to various terms and conditions including a guarantee of payment from  
Castor1  
521  
.
[
1447] On October 17, 1989, YHHL wrote to Stolzenberg that if Castor was not  
providing it the funds required to pay the National Bank by October 20, 1989, YHHL was  
expecting the National Bank to demand payment of its entire loan during the week of  
rd 1522  
October 23 .  
[
1448] On November 13, 1989, FICAN’s solicitors advised Castor that they had been  
1523  
.
instructed to proceed with their motion to appoint a receiver to MLVII  
[
1449] An agreement intervened between Castor and FICAN and Castor issued various  
1524  
.
checks to pay interests, legal fees and collection fees to FICAN  
[1450] MLVII’s financial condition worsened during 1989:  
•
•
•
Commitment letter from Mellon had expired and was withdrawn;  
YH had not been successful at attempts to sell the properties;  
National Bank and FICAN claimed their loans were in default and  
demanded immediate payments;  
•
•
MLVII continued to produce poor financial results1525  
;
Castor loan to fund operating shortfalls, which by its terms was to be  
repaid by September 15, 1988, was not repaid in 1989. Instead, the  
balance of the loan had increased to $4.76 million.  
[
1451] Income projections used to value the hotels, in 1988, and the Mall, in 1989, were  
1526  
.
not met  
1519  
1520  
1521  
1522  
1523  
1524  
1525  
1526  
PW-1070F-18A  
Ron Smith, September, 22, 2008, p.242-243  
PW-1070F-20; PW-1070F-22  
PW-482C  
PW-1070F-25  
PW-1070F-27, PW-1070F-28, PW-1070F-29,PW-1070F-30, PW-1070F-33  
PW-1053-19, sequential pages 161-162; PW-478G; PW-478H  
PW-494, bates 000089, PW-496, bates 000064 and PW-478I  
500-05-001686-946  
PAGE: 292  
[
1452] Castor received unaudited financial statements of MLVII as of December 31,  
1
9891 reporting net losses of more than 3 million.  
527  
[
1453] As of December 31, 1989, the annual interest obligation of MLV was 24.1 million  
1528  
.
on outstanding loans totalling 166 million  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1454] At December 31, 1989, $109.2 million of loans were owed to Castor in relation to  
the MLV properties (some to CHL and some to CHIF).  
Loans owed to CHL  
•
•
•
•
•
•
•
•
•
•
Loan 1105 to MLVII –4.8 million1529  
Loan 1048 to YHLP – 14 million1530  
Loan 1125 to KVWI – 7.2 million1531  
Loan 1126 to MLVII – 4.8 million1532  
Loan 1136 to MLVII (re FICAN) – 0.1 million1533  
Loan 1011 to Harling International – 3 million1534  
Loan 1012 to Runaldri S.A. – 2 million1535  
Loan 1013 to Charbocean Trading – 4 million1536  
Loan 1014 to Harling Finance – 7.5 million1537  
Loan 1015 to Gebeau Overseas – 5 million1538  
1527  
1528  
1529  
1530  
1531  
1532  
1533  
1534  
1535  
1536  
1537  
PW-478G  
PW-1076B  
PW-1053-19, sequential pages 154-155  
PW-1053-19, sequential pages 152-153  
PW-1053-19, sequential pages 233-235  
PW-1053-19, sequential pages 156-157  
PW-1053-19, sequential page 99  
PW-1053-19-11, sequential pages 134-135  
PW-1053-19-11, sequential pages 136-137  
PW-1053-19-11, sequential pages 138-139  
PW-1053-19-11, sequential pages 144-145  
500-05-001686-946  
PAGE: 293  
•
•
•
•
Loan 1016 to Gebeau Holding – 2.420 million1539  
Loan 1017 to Harling International – 3 million1540  
Loan 1018 to Trade Retriever – 2.280 million1541  
Loan 1019 to Trade Retriever – 2.220 million1542  
Loans owed to CHIF  
•
•
•
•
•
•
•
•
•
•
Loan 770001/0009 to Runaldri –4.2 million1543  
Loan 26100/0004 to Charbocean Trading –8.4 million1544  
Loan 385005/3010 to Gebau Overseas - 9.9 million1545  
Loan 385009/3005 to Gebau Overseas –3.3 million1546  
Loan 385009/0003 to Gebau Overseas –3.8 million1547  
Loan 38500/0008 to Gebau Overseas – 0.9 million1548  
Loan 38500/0004 to Gebau Overseas – 3.704 million1549  
Loan 441004/3010 to Harling International – 4.5 million1550  
Loan 441004/0008 to Harling International –8.4million1551  
Loan 890000/0010 to Trade Retriever –5.5 million1552  
[
1455] CHL’s loans to YHLP, KVWI and MLV investors remained unchanged from 1988  
1553  
.
balances  
1538  
1539  
1540  
1541  
1542  
1543  
1544  
1545  
1546  
1547  
1548  
1549  
1550  
1551  
1552  
1553  
PW-1053-19-11, sequential pages 142-143  
PW-1053-19-11, sequential pages 140-141  
PW-1053-19-11, sequential pages 146-147  
PW-1053-19-11, sequential pages 148-149  
PW-1053-19-11, sequential pages 150-151  
PW-1053-89, sequential pages 240, 250, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential pages 240, 249, 261  
PW-1053-89, sequential page 240, 249, 261  
PW-1053-89, sequential page 240, 249, 261  
PW-1053-89, sequential page 240, 250, 261  
PW-1053-19, sequential pages 20-21  
500-05-001686-946  
PAGE: 294  
[
1456] CHL’s loans to MLVII increased from $3.3 million to $10 million, including  
accrued interests.  
[
1457] CHIF’s loans to MLV investors increased from $40.3 million to $46.2 million due  
to interest capitalization.  
In t er es t s r ecogn ized a s r even u e  
[
1458] In 1989, Castor recognized interests totalling $9,537,718.57 as revenue on MLV  
1554  
.
related loans  
Ap p r a is a ls 1 9 8 9  
[
1459] McKittrick of Jones McKittrick Somer Ltd. prepared an appraisal to assist YHHL  
management in evaluating the MLV mall (including the mall, the amusement park land  
1
555  
and the observation tower) . It provided a market value opinion of 26 million,  
calculated through the income approach and based on the following assumptions:  
•
Income projections based on the assumption that a walkway to join different  
levels would be completed in the spring of 1989.  
•
Rental income projected to increase annually (at various rates) and expenses  
projected to increase by 5% to match inflation.  
•
•
Vacancy rates projected at 7.5%, compared to current vacancy rates of 19%.  
Base rents projected to increase by 100% the first year and, thereafter, by 5%  
annually due to the new walkway.  
•
A discount rate of 12%.  
[
1460] In their AWPs, C&L wrote they had seen a $40 million appraisal for the mall and  
1556  
the amusement park land prepared by R.W. Hughes . Ron Smith testified that no  
1
557  
such appraisal ever existed, a testimony the Court finds credible and reliable  
.
[
1461] In August 1989, for the purpose of seeking investors who were not hotel  
investors, but who required income tax write-offs, Prychidny prepared a written estimate  
of value of the MLV mall and developable land, apart from the hotel properties, in which  
he inscribed a value of $40 million: $30 million for the mall, and $10 million for the  
developable land1  
558  
.
1554  
1555  
1556  
1557  
1558  
PW-1075A  
PW-496  
PW-1053-19-9  
Ron Smith, May 16, 2008, p.173  
D-145  
500-05-001686-946  
PAGE: 295  
[
1462] At trial, Prychidny explained the circumstances surrounding this proposal and  
1559  
:
affirmed that, notwithstanding its content, there was no value to developable land  
•
The proposal was prepared to explore the possibility of developing a master  
limited partnership;  
•
The proposed transaction assumed that the three MLV hotels (the Foxhead, the  
Brock and the Village Inn) would be sold to a master limited partnership for $70  
million with these investors investing in it under the terms and conditions  
described;  
•
•
The proposal did not bear resemblance to the market place and Prychidny was  
embarrassed to present it;  
Nevertheless, YHHL approached wealthy individual real estate promoters who  
required tax write-offs, but to no avail. These promoters were not interested in  
pursuing discussions;  
•
•
This proposal included a 40 million value based on the McKittrick appraisal (26  
million rounded to 30 million) plus 10 million proposed by Wersebe for  
developable land;  
But there was no developable land and no value.  
And there's actually, when you look at the property itself, there's really no excess  
land, unless you tore down the Village Inn Motel.  
I recall clearing him on that, saying that the mall and the hotels required parking,  
so if you assume there's surplus land, you'd lose a parking. He responded that  
well, then we would build a multi-level parking structure to accommodate the  
parking and build the developable real estate above that. So, there was no  
accounting for the cost to build this multi-level parking if in fact that can be  
1560  
done  
.
[
1463] There were no contemporaneous appraisals for the amusement park assets. The  
only appraisal available was the Mullins appraisal of 1983 which estimated the  
1
561  
.
replacement cost of the rides at $6.8 million  
Exp er t s ’ evid en ce  
[
1464] Vance opined that a minimum LLP of $60 million was required, based on the  
following elements:  
1559  
1560  
1561  
Prychidny, November 10, 2008, pp.114 and following  
Prychidny, November 10, 2008, pp.116-117  
PW-493  
500-05-001686-946  
PAGE: 296  
•
A maximum total value of $93.7 million ($67.7 million for the hotels and  
wax museum plus $26 million for the mall and amusement park);  
•
•
•
Prior ranking debts and other adjustments of $48.7 million;  
Castor’s total exposure of $108.5 million;  
A deficiency of $59,823 million (rounded at $60 million) and no other  
1
562  
sources to cover it.  
[
1465] Vance opined that using a total value of $144 million was totally inappropriate in  
the circumstances and that the value figure should not exceed $93.7 million.  
[
1466] Vance’s opinion on the topic of “other possible sources for payment”, summed up  
in the 1988 financial statements section of this judgment, applies mutatis mutandis to  
the 1989 situation.  
[
1467] Froese opined that a minimum LLP of $52.2 million was required, based on the  
following elements:  
•
Total value of $101.7 million ($67.7 million for the hotels and the wax  
museum plus $26 million for the mall and amusement park land, plus 6.5  
million for the amusement park rides, plus $1.4 million for current assets);  
•
•
•
Prior ranking debts and other adjustments of $45.2 million;  
Castor’s total exposure of $108.5 million;  
A deficiency of $52.2 million and no other sources to cover it1563  
.
[
1468] Rosen opined that a minimum LLP of $50 million was required, based on the  
following elements:  
•
Total value of $117 million ($91 million for the hotels and the wax museum  
plus $26 million for the mall and amusement park);  
•
•
Castor’s total exposure of $114.5 million;  
A minimum deficiency between value available to Castor and Castor’s  
1
564  
.
total exposure of $50 million  
[
1469] Goodman opined that no LLPs were required, even though he calculated a  
1565  
:
deficiency of $12.6 million, based on the following elements  
1562  
1563  
1564  
PW-2908, vol. 2, section A; PW-2908, vol. 3, Tab # 1; Vance, April 9, 2008  
PW-2941, vol.3, p.57; Froese, November 25, 2008  
Rosen, February 3, 2009; Rosen, April 8, 2009; PW-3033, vol II, section D  
500-05-001686-946  
PAGE: 297  
•
A total value of $140.9 million resulting from the $40 million value figure  
for the mall, the amusement park land and the surplus developable land,  
plus the $104 million figure for the hotels and wax museum, less $9.6  
million for costs of enhancements, plus $6.5 million figure value for the  
amusement park rides;  
•
Prior ranking debts (Great-West, FICAN and National bank) and other  
adjustments of $44.3 million;  
•
•
Castor’s total exposure of $109.2 million;  
A deficiency between value available to Castor (96.6 million) and Castor’s  
total exposure ($109.2 million) of $12.6 million;  
•
The availability of other sources to cover the deficiency (Gambazzi’s  
deposits and Wersebe’s and Stolzenberg’s guarantees.)  
[
1470] Goodman testified about his understanding of the expression “ a property is over  
leveraged” as follows:  
The conventional views of what overleveraged would mean from a standpoint of  
a property can range from the following: One, there is indebtedness associated  
with or attached to a property that exceeds the cost of the property.  
There can be indebtedness, either attached to or associated with the property,  
that can exceed its market value.  
Or thirdly, there can be indebtedness, attached to or associated with the  
property, that can exceed its liquidation value.  
The term "overleveraged" is used in those three contexts and one would have to  
look at the particular facts of any situation to determine in what context the term  
"
overleveraged" was being used in order to determine whether it's with respect to  
the cost of the property, the market value of the property or the liquidation value  
of the property, or some other value of the property1566  
.
[
1471] Goodman acknowledged that when Ron Smith was using the expression  
“
running out of projects”, Ron Smith meant that the debt on projects was already over  
1
567  
.
1
00% of the project market value  
Conclusions  
Va lu e a n d m in im u m d eficien cy befor e ot h er r ecover y s ou r ces  
1565  
1566  
1567  
D-1295, p. 349  
Goodman, November 30, 2009, pp.94-95  
Goodman, November 30, 2009, p.100-101  
500-05-001686-946  
PAGE: 298  
[
1472] For the reasons expressed in the 1988 financial statements section of this  
judgment, and in light of the additional specific evidence regarding the MLV project  
during 1989, the 104 million value figure cannot be used to value the hotels.  
[
1473] The 40 million value figure used by Goodman for the mall, the amusement park  
and the excess land, based on the $26 million appraisal and a memo written by  
Prychidny cannot be used either. Prychidny’s testimony, that the Court finds credible  
and reliable, indicates that no “excess land” value existed.  
[
1474] The best possible scenario, as in 1988, would result into a total value figure of  
$
100 million.  
[
1475] Based on a total value figure of $100 million, taking account of the minimum prior  
ranking debts and other adjustments figure (Goodman’s figure of $44.3 million) and of  
the minimum Castor total exposure (Vance’s and Froese’s figure of $108.5 million), the  
minimum deficiency on MLV is $ 52.9 million.  
Ot h er p os s ible s ou r ces of r ecover y  
[
1476] The analysis developed and the conclusions enunciated in the 1988 financial  
statements section of this judgment apply mutatis mutandis.  
YH Corporate loans  
[
1477] The loans which are part of the YH Corporate loans for 1989, and which were  
looked at by Plaintiff’s experts, are those described under the subheading “YH  
1
568  
Corporate loans” of the 1988 financial statements section of the present judgment  
and the new loan created at year-end, loan 1137.  
Experts’ positions  
[
1478] Plaintiff’s experts opined that a LLP was required for the YH corporate loans,  
such proposed minimum LLP being:  
•
•
111.1 million, according to Vance.1569  
80.6 million, according to Froese -with a middle point, then, of 97.4 million1570 or,  
assuming various factual hypotheses suggested during cross-examination, a  
1
571  
range of 87.8 to 93.9 million with a mid-point, then, of 90.8 million.  
1
568  
Account 046/loan 1053 , Loans 1123, 1081, 1092, 1090 and 1091, the CFAG loans and some various  
loans made by CHIF to Harling and KVWI  
1569  
1570  
1571  
PW-2908, vol.II, p.B-15  
PW-2941, volume 4, p. 2; PW-2941 new page 65, Froese, November 28, 2008, p.162  
PW-2941-4, schedule 3 and schedule 4  
5
00-05-001686-946 PAGE: 299  
113 million, according to Rosen.1572  
1479] Goodman opined that no LLPs were needed for the YH corporate loans.  
•
[
Additional evidence specific to YH Corporate loans  
1
9 8 9 even t s  
[
1480] In 1989, Stolzenberg signed, on behalf of Castor, an acknowledgement  
confirming that Wersebe’s European holdings would not be included in provisions of  
1
573  
Such acknowledgement was the  
Wersebe’s personal guarantees provided to Castor.  
1
574  
result of previous discussions and understandings.  
[
1481] In July 1989, loan 1081 to YHDHL was increased from $30 million to $35 million.  
The term of the loan was extended from July 31, 1989 to November 1, 1990 and the  
personal guarantee of Wersebe was increased to $21,125,0001575  
.
[
1482] YH executives (Wersebe, Whiting and Lyndon) determined that the North  
1576  
American YH Group deficiency exceeded $349 million as at September 1989 , and  
1
577  
that Castor’s exposure to such deficiency was $245 million.  
[
1483] Whiting, chief financial officer of YHDL, prepared a “Fair Value Balance Sheet”  
1578 1579  
that Stolzenberg described as “hot air”.  
for YHDL as at September 30, 1989  
[
1484] Said fair value balance sheet as at September 30, 19891580  
:
•
•
Disclosed an adjusted equity deficiency of $33.9 million;  
Attributed no value to receivables from parent/affiliated companies totalling  
$
133,869,0001  
581  
1572  
1573  
1574  
1575  
1576  
1577  
1578  
1579  
1580  
Plaintiff’s written submissions of July 8, 2010, p.22  
PW-1058-4  
PW-1058-2  
PW-1054-14  
Whiting, November 29, 1999, pp. 186-188.  
PW-1157; Vance, April 15, 2010, pp. 65-66.  
PW-1149  
Whiting April 26, 2000, p. 116.  
PW-1149.  
500-05-001686-946  
PAGE: 300  
•
Assumed that YHDL’s $3.8 million investment in shares of YHLP had no  
value;  
•
•
•
Assumed that YHDL’s receivable from Gebau Overseas had no value;  
Assumed that a receivable from Harling International was impaired;  
Reflected the following fair market values of properties:  
o MEC : $300 million  
o Hazelton Lanes: $182 million  
o TWTC and TWTC option: $472 million  
o Palace II : $ 9 million  
o Triumph Hotel : $50 million  
o Meadowlark: $22 million.  
[
1485] YH management threatened to resign en masse unless Castor agreed to fund  
1582  
YH’s operating requirements.  
[
1486] On December 4, 1989 and as part of the year-end reallocation of the balance  
appearing in account 046, Castor provided a $10 million loan to YHH Investments  
(
“YHHI”), loan 1137, secured by a pledge of all management contracts on the three  
1583  
.
Skyline Hotels and MLV  
[
1487] On December 11, 1989, as part of the year-end reallocation of the balance  
1584  
appearing in account 046 and given capitalization of interest on the loan itself , loan  
1
123 to KVWIL increased from $14.4 million to $27 million, the maturity date of the loan  
1585  
and Wersebe’s personal  
was extended from December 1989 to December 1990  
1
586  
.
guarantee was increased to $22.5 million  
[
1488] Effective December 29, 1989, loan 1090 to YHDL increased and went from $3.2  
million to $6.5 million, and its term was extended from December 1989 to December  
9901  
587  
.
1
1
581  
Those are the receivables that were the object of the draft adverse opinion of YHDL’s auditors (PW-  
1
148)  
1582  
1583  
1584  
1585  
1586  
1587  
Quigley, March 15, 2010, pp. 213-214; March 16, 2010, pp. 63-64.  
PW-1062-1  
PW-1056C, page 2  
PW-1058-6  
PW-1058-6  
PW-1061-6  
500-05-001686-946  
PAGE: 301  
[
1489] Loan 1092, in the amount of $10 million, was extended from December 1989 to  
December 1990.  
[
1490] In December 1989, documents were shown by YH to Castor evidencing YH’s  
1588  
YH management determined that Castor was seriously exposed to  
insolvency.  
deficiencies.1  
589  
[
1491] In a year-end memo dated December 28, 1989, Ron Smith provided direction to  
YHDL that the loans proceeds of $13.2 million were to pay interest and principal related  
to specified YHDL loans to Castor and requested that YHDL facilitate the flow of  
funds.1  
590  
[
1492] In late December 1989, Castor resorted again to a cash circle operation. On  
December 26, 1989, Castor disbursed $13.2 million to McLean & Kerr. Those advances  
funded two loan transactions made with YHDL (the increase in the amount of $10  
million of loan 1067 and the increase in the amount of $3.2 million of loan 1090). Most  
of the funds were returned to Castor and recorded as payments of interest, fees and  
1
591  
Two checks totalling $13.2 million payable to McLean  
principal on various loans.  
1
592  
.
&
Kerr in trust were issued by CHL and recorded in CHL’s cash disbursement journal  
1
593  
On the same day, CHL collected $12,868,000.00.  
[
1493] The balance in G/L account 046 was $120,229 as at December 31, 19891594  
.
•
At December 31, 1988, account 046 had been reduced to $1,834  
595  
9
92.04.1  
During 1989, account 046 grew at least to $35 945,229.00  
1
596  
•
by  
December 29, 1989 when it was reduced by a transfer of $35  
8
25,000.00.1  
597  
•
Part of the above increase was due :  
o to capitalization of interest (over $13.5 million);  
o to fees in excess of $3 million;  
1588  
1589  
1590  
1591  
1592  
1593  
1594  
1595  
1596  
1597  
PW-1149; PW-499C-1; PW-1153; Whiting, November 17, 1999, pp. 93-103.  
PW-1157; Vance, April 15, 2010. pp.65-66; Whiting, November 29, 1999, pp. 186-188  
PW-1061-7  
PW-2941, volume 4, p.30, paragraph 2.74  
PW-96, bates 000003 and 000004  
PW-96, bates 000195; PW-2908,vol. II, pp B-11 and B-12  
PW-80, bates 000049  
PW-79, bates 52 and PW-80, bates 000045  
PW-80, bates 000045 to 000049  
PW-80, bates 000049. See loans 1081, 1137, 1042 and 1123 to which the reallocation was made  
500-05-001686-946  
PAGE: 302  
o to accrued interests in excess of $3 million on the CFAG loans ;  
and  
o to advances to and on behalf of YHDL (over $17.5 million).1598  
[
1494] C&L looked at account 046, made notes in their audit working papers, namely of  
1599  
the capitalization of interest.  
[
1495] CFAG loans ($20 million) were unchanged during 1989.  
1496] Castor did not record a specific allowance for LLPs for any YH corporate loans in  
[
1
989.  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1497] As of December 31, 1989, the balances of “YH Corporate loans” owed to Castor  
and specifically reviewed by Plaintiff’s experts were:  
•
•
•
•
•
•
•
Loan 1123 to KVWIL- 27 million1600  
Loan 1081 to YHDHL – 35 million1601  
Loan 1092 to YHDL- 10 million1602  
Loan 1091 to YHDL – 29 million1603  
Loan 1090 to YHDL- 6.5 million1604  
Loan 1137 to YHHI - 10 million1605  
CFAG loans to YH – 20 million1606  
.
In t er es t s r ecogn is ed a s r even u e  
1
598  
PW-80, bates 000045 to 000049 (see namely for list of journal entries and of cash disbursements); as  
examples of journal entries see PW-95, bates 000018, 000080 and 000081, 000127 and 000128,  
0
00132 and 000133, 000163, 000178 to 000184, 000267 to 000270, 000291 and 000292, 000334  
and 000335, 000343 and 000344, 000410 to 000414, 000567 and 000568; as examples of cash  
disbursements see: PW-96, bates 000015 and 000016, 000050 and 000066, 000074 and 000079,  
0
00081 and 000082, 00085 and 00086, 00091 and 00092, 000107 and 000108, 000141.  
1599  
1600  
1601  
1602  
1603  
1604  
1605  
1606  
PW-1053-19, sequential pages 24 and 26  
PW-1053-19, sequential pages 236-238  
PW-1053-19, sequential pages 208-210  
PW-1053-19, sequential pages 206-207  
PW-1053-19, sequential pages 181-183  
PW-1053-19, sequential pages 204-205  
PW-1053-19, sequential pages 251-252  
PW-1053-73, sequential pages 296-300; PW-1053-72, sequential pages 94, 112, 146, 273, 286;  
500-05-001686-946  
PAGE: 303  
[
1498] In 1989, Castor recognized interests on YH corporate loans totalling $21.2 million  
1607  
.
as revenue  
Exp er t s ’ evid en ce  
Va n ce  
[
1499] Vance used the same methodology as he used for the 1988 financial  
1
608  
609  
statements.  
He opined that Castor’s exposure to YH Corporate loans amounted to  
121 million1 and that the minimum LLP was of $111 million.  
1610  
$
[
1500] Vance explained why Castor’s exposure had increased: the snowball effect of  
1611  
the capitalization of interest.  
1
612  
Those financial  
[
1501] Vance took into account various financial statements.  
statements or their content were available to C&L or should have been made available  
to C&L had they asked for them since the YH group had the obligation to regularly  
provide financial statements and financial information to Castor (according to loan  
covenants signed).1  
613  
[
1502] Vance looked at the Wersebe’s personal guarantees and concluded they had no  
1614  
value.  
[
1503] Vance namely looked at the financial situations of YHDHL and KVWIL and he  
1615  
concluded that they had not improved.  
[
1504] Vance indicated that the content of the “fair value balance sheet” prepared by  
1616  
received by  
Whiting was relevant namely in light of the draft adverse audit opinion  
YHDL.1  
617  
1607  
1608  
1609  
1610  
1611  
1612  
1613  
1614  
1615  
1616  
1617  
PW-1485 R; PW-2908. Vol.1, S-9  
Vance, April 14, 2008, pp.166 and followings  
Vance, April 14, 2008, pp.165-166  
Vance, April 14, 2008, p.156  
Vance, April 14, 2008, p.157  
PW-1137-4, PW-1138-1, PW-1136-5, PW-1140, PW-1165-1.  
Vance, April 14, 2008, pp.177-178  
Vance, April 14, 2008, p.142  
Vance, April 14, 2008, pp.167 and followings  
PW-1148A  
Vance, April 14, 2008, pp.175-176  
500-05-001686-946  
PAGE: 304  
Fr oes e  
[
1505] Froese reached the conclusion that there was no collateral value to the common  
1618  
or special shares of YHDL.  
[
1506] Froese took account of the “fair value balance sheet” prepared by Whiting as of  
1619  
Froese indicated that it was  
September 30, 1989 (PW-1149) and he explained why.  
showing a significant shortfall along with a lot of inter-company parent affiliates  
1
620  
provisions.  
He confirmed that PW-1149 included values in excess of the  
1
621  
reality. Acknowledging that it had been prepared for negotiation purposes and that it  
had not been audited, Froese said the amount of negative equity shown was  
nevertheless consistent with:  
•
the information gathered by Thorne Ernst & Whinney who had issued a draft  
1622  
adverse opinion that there were significant write-downs or provisions  
required;  
•
•
the inability of YHDL to make its payments as they came due;  
the fact that YHDL was not able to provide audited financial statements to Castor  
as it had to; and  
•
the testimony of Ron Smith in relation to his evaluation of loans to YHDL. 1623  
[
1507] Froese confirmed he had considered the possibility that YH could have withheld  
1624  
but he added that C&L should  
information such as the draft adverse audit opinion  
have raised questions, which they did not. Given the loan covenants signed by the YH  
group, Froese explained that asking questions would have lead C&L somewhere  
independent of the answers; it would have raised issues as to why no audited financial  
statements were provided to Castor or as to why communication of them was  
refused.1  
625  
Let's go to the example you used, then, the adverse audit opinion. I would agree  
with you that York-Hannover would not necessarily want to disclose a draft  
adverse audit opinion to either Castor or to Coopers & Lybrand. And what I  
outlined in my testimony was that in requesting an audited financial statements  
for nineteen eighty- eight (1988), the auditors either will get something or they  
1
618  
619  
Froese, November 28, 2008, pp.8 and followings  
1
Froese, November 28, 2008, pp.59 and followings; Froese, January, 8 2009, pp.192 -238; Froese,  
January 9, 2009, pp.23- 57  
1620  
1621  
1622  
1623  
Froese, November 28, 2008, p.64  
Froese, January 9, 2009, pp.46-48  
PW-1148A  
Froese, November 28, 2008, p.64-66; Froese, January 9, 2009, pp. 104-105; Ron Smith, Mai 14,  
2
008, pp.56 -63 ;  
1
624  
625  
PW-1148A  
1
Froese, December 4, 2008, pp.187; Froese, January 9, 2009, pp.117-122-  
500-05-001686-946  
PAGE: 305  
won't. And if they're told there isn't one available, Castor says there's not one  
available from York-Hannover, they've not finished their audit yet or whatever  
they're told, you have the option of asking to speak to the auditors. If you're not  
given permission for that, that tells you information as an auditor as well, why  
can't I speak to the auditors of the borrowers? So, either way, I think it raises  
issues that you want to deal with as an auditor, as to whether this loan is a  
1626  
problem loan and how much work you want to do around that one.  
[
1508] Froese explained how he had treated the two options that had been granted as  
1627  
collateral.  
[
1509] Froese explained why he had given no value in 1989 to receivables granted as  
1628  
collateral for loan 1092.  
[
1510] Froese confirmed he had given no value to the management contracts given as  
security for loan 1137 and explained why: Froese namely took into account the general  
circumstances of the hotels’ operations and a subsequent event (a change in security)  
that took place in March of 1990 specifying that C&L should have been still working on  
the 1989 audit given all the issues they should have looked at before issuing their  
report.1  
629  
[
1511] Froese said he had given no value to Wersebe’s personal guarantee in 1989. He  
1630  
reiterated that C&L had never looked at Wersebe’s financial situation.  
[
1512] Froese confirmed that his position concerning the CFAG loans for the 1989  
1631  
financial statements was the same as for 1988.  
[
1513] Froese explained why there were some differences in the low end of his  
suggested range of LLPs and why there were some differences between the suggested  
1
632  
Nevertheless, Froese confirmed he was confortable to  
ranges of Plaintiff’s experts.  
opine that a large LLP was required for the YH Corporate loans.  
1
633  
[
1514] Given the differences between experts, Froese summarized the relevant  
questions or issues for the Court as follows:  
The first question is: Are the ranges approximately reasonable? And you'll have  
to evaluate the ranges. But the second part of it is: What should Coopers &  
1626  
1627  
1628  
1629  
1630  
1631  
1632  
1633  
Froese, December 4, 2008, pp.187-188  
Froese, November 28, 2008, pp.69-71  
Froese, November 28, 2008, pp.71-72  
Froese, November 28, 2008, pp.72-76  
Froese, November 28, 2008, p.137  
Froese, November 28, 2008, pp.121 and followings  
Froese, December 5, 2008, pp.12-18;  
Froese, January 9, 2009, pp.117-122  
500-05-001686-946  
PAGE: 306  
Lybrand have reasonably come up with as a range had they complied with  
1634  
GAAS?  
Ros en  
[
1515] Rosen confirmed he had prepared a range of LLPs, not a best possible  
1635  
estimate.  
[
1516] Rosen reaffirmed he had given C&L the benefit of the doubt when calculating his  
1636  
suggested ranges of LLPs.  
Good m a n  
[
1517] Goodman’s positions relating to the YH Corporate loans for the 1989 audit is the  
same as for the 1988 audit and has already been discussed earlier in the present  
judgment.  
Conclusions  
[
1518] The events that took place during 1989 strengthen the conclusion that personal  
guarantees granted by Wersebe were worthless to Castor in that they were limited to  
1
637  
which were fully leveraged and  
Wersebe’s interests in his North American entities  
insolvent.1  
638  
[
1519] All the comments made relating to the YH Corporate loans for the 1988 audit,  
under the subheading “YH Corporate loans”, apply mutatis mutandis to the 1989 audit.  
[
1520] Even though it might not have been communicated to C&L when they did their  
audit field work for the 1989 audit, as Froese acknowledged during his testimony, the  
Court finds using exhibit PW-1149 in GAAP analysis, as Plaintiff’s experts did, is  
appropriate since PW-1149 was remitted then to Castor and since it represented the  
contemporaneous position or understanding of Castor’s debtors (YH group)  
representatives.  
[
1521] Plaintiff experts’ opinions must prevail: a huge LLP was required in relation to the  
YH Corporate loans in 1989.  
MEC  
1634  
1635  
1636  
1637  
1638  
Froese, December 5, 2008, p.17  
Rosen, April 8, 2009, pp.18-19  
Rosen, April 8, 2009, pp.33-34  
Ron. Smith, May 14, 2008, pp. 212-213, 246-247; PW-1058-2; PW-1058-4.  
Ron Smith, May 14, 2008, p.83; PW-1153; Prychidny, October 14, 2008, pp.83-85; D-1312, ES-25,  
1
54  
500-05-001686-946  
PAGE: 307  
Experts’ positions  
Pla in t iff’s exp er t s  
[
1522] All plaintiff experts opined a LLP was required for the MEC in 1989 and they all  
added that the loans should have been placed on a non-accrual basis during 1989.  
1
1
639  
640  
[
1523] Vance opined the minimum required LLP was in the amount of 20.9 million,  
Froese opined his mid-point was 14.4 million (his range being 1.4 to 27.4 million)  
and Rosen calculated a range between 59 and 73 million using the methodology of  
percentage of completion.1  
641  
[
1524] Vance used a MEC market value at completion of $303 million including the  
1642 1643  
($261 million plus $ 42 million for the pad).  
pad  
[
1525] Froese used a range of market value for the MEC project, excluding the pad, of  
$
266 to $285 million.1  
644  
[
1526] Froese indicated that the LLP could have been a nominal amount had Castor  
placed the loans related to MEC on a non-accrual basis in 1989, ceased to accrue  
interest on the loans and disclosed the extent of loans on a non-accrual basis in its  
financial statements.1 This was not done.  
645  
[
1527] Vance and Froese took into account future interest payable to Castor, as part of  
the costs to complete.  
Good m a n  
[
1528] Goodman opined that there was a surplus of $15 million in 1989 using the  
1646  
following figures:  
•
Total value: $331.1 million;  
1
647  
plus $42  
o MEC market value at completion : $317 million ($275 million  
million);  
o Palace II and tunnel : $11 million;  
1
1
1
1
1
1
1
639  
640  
641  
642  
643  
644  
645  
Vance, April, 10, 2008, pp.94 and following  
PW-2941, volume 3, p.169 and PW-2941-4, schedule 1; Froese, November 26, 2008, pp. 76-84  
PW-3033; Rosen, April 7, 2009, pp.67-75, 168-169, and 185 and following  
Vance, April, 10, 2008, p.95  
PW-1108  
PW-2941, vol. 3, p.205  
PW-2941, volume 3, pp.169-170, 205 and PW-2941-4, schedule 1 note 7; Froese, November 26,  
2
008, pp. 76-84  
1646  
647  
D-1325;  
1
His best estimate from PW-1108A  
500-05-001686-946  
PAGE: 308  
o Contribution from third parties and tenant accounts receivable : $3.1  
million  
•
•
•
Total value of collateral security : $265.9 million;  
Prior ranking creditor exposure: $ 103.4 million;  
Castor’s exposure to MEC project: $ 147.5 million.  
[
1529] Goodman did not include future interest payable to Castor in his costs to  
complete.  
[
1530] Goodman explained that his loan security surplus had declined from 1988 (from  
8.4 million to 15 million) as a result of the following factors:  
5
•
•
Delays and cost increases;  
Absence of contemporaneous appraisal.1648  
Additional evidence specific to MEC  
Gen er a lit ies  
[
1531] After the project started, and all through 1989, there were various slowdowns  
due to the changes of the scope of the project, from Scheme A to Scheme B and C for  
1
649  
namely as a result of changes in the scope of the  
the pad. Costs escalated  
project1  
650  
.
[
1532] Bank of Montreal agreed that they would continue funding the project, but they  
made it very clear that they were the last ones in and the first ones out, and that they  
expected that the owners or Castor would cover any deficiency before Bank of Montreal  
1
651  
.
would put up any additional funds  
[
1533] Dragonas more or less became the person representing the owners' interests  
1652  
which started taking over control of the project from YHDL. Most of the  
under 97872  
overruns and the costs relating to the development of the office pad were put through  
1
653  
the loan facility granted to 97872 , loan 1145.  
[
1534] According to MEC’s audited financial statements for the year ended September  
0, 1989, project costs incurred as of that date were $197 million and estimated costs to  
3
1
1
1
1
1
1
648  
D-1312, p. 145  
649  
Ron Smith, September 15. 2008, p. 157  
650  
651  
652  
653  
Ron Smith, September 15, 2008, pp.196-197  
Ron Smith, September 15, 2008, p. 157  
Ron Smith, September 15, 2008, p. 160  
Ron Smith, September 15, 2008, p. 160,162-163, 178-179; PW-1104, tab 11  
500-05-001686-946  
PAGE: 309  
complete the property under development were approximately $80 million, resulting in  
1
654  
.
an estimated total cost of the project of $277 million  
1535] In the Fair Value Balance Sheet prepared by YHDL, dated December 14, 1989,  
[
Whiting assumed that the fair market value of 100% of the MEC would be $300  
1
655  
.
million  
[
1536] The December 1989 Monthly Project Report, dated February 6, 1990, provided  
1656  
the following analysis of project economics:  
“
Based upon Royal LePage appraisal of August 5, 1988 (with office tower), the  
economics of the project are:  
Mean appraisal value  
275,000,000  
(
Based on a N.O.I. of $18,508,000)  
Less: Total project loans  
209,416,826  
65,583,174  
33,609,477  
Equity before advances  
Less: Co-owners’ advances  
NET EQUITY  
31,973,697”  
[
1537] At December 31, 1989, Castor had equity loans outstanding of $24 million to  
YHDL, $10 million to 612044, and $30.2 million to 97872, or almost exactly the amount  
of “equity before advances” calculated in the Report.  
[1538] There was no additional appraisal done in 1989.  
Sp ecific fa ct s of 1 9 8 9  
1
657  
The  
[
1539] Castor provided a new loan facility to Palace II of up to $3 million.  
proceeds of this loan were used to pay interests and fees on CHIF loan of $7.55 million,  
as well as legal fees.1  
658  
[
1540] Unaudited financial statements for 97872 for the year ended July 31, 1989, a  
1659  
notice to reader dated January 14, 1990, disclosed a deficit of $6.8 million.  
[
1541] Draft audited financial statements for 97872 for the year ended September 30,  
1
989 were transmitted by Peat Marwick Thorne to Goulakos with a letter listing  
outstanding significant matters, including the following:  
1654  
1655  
1656  
1657  
1658  
1659  
D-99A, page 7.  
PW-1149.  
D-99E.  
PW-283A-3  
PW-283A-2  
D-96  
500-05-001686-946  
PAGE: 310  
Receipt of final audited financial statements of the Montreal Eaton Center Project  
from our Montreal office. I understand these statements will be finalized upon  
resolution of the project financing negotiations.1  
660  
[
1542] Unaudited financial statements for 612044 for the year ended October 31, 1989,  
a notice to reader dated November 14, 1989, disclosed :  
•
•
•
•
a deficit of $2.8 million;  
an advance of $2,345,317 from 606752 Ontario Limited;  
a $7.5 million investment in 97872;  
a $100 investment in Palace II. 1661  
[
1543] In November 1989, Castor extended its $7.5 million loan to 612044 from  
1662  
612044 agreed to  
November 1989 to November 1990 and increased it to $10 million.  
limit encumbrances against its assets and the issuance of additional shares. 612044  
reiterated that security included 100% of the common shares of 97872 and $7.5 million  
1
663  
of the preferred shares of 97872.  
[
1544] In December 1989, Castor provided a revolving line of credit to 97872 in the  
amount of up to $45 million (loan 1145). The purpose of the loan was disclosed as to  
1664  
finance Borrower’s investment in real estate.”  
“
[
1545] The audited financial statements of MEC for the year ended September 30,  
1
989, with the auditor’s report dated December 15, 1989, indicated that the project  
costs incurred were $197 million and that the estimated costs to complete were  
1
665  
These statements also disclosed  
approximately $80 million for a total of $277 million.  
a subsequent event: the sale of the pad for an amount of $42 million.  
1
666  
[1546] In its “Fair value balance sheet”, prepared by Whiting and remitted to Castor, YH:  
•
•
Assumed that the fair market value of 100% of the MEC was $300 million;  
Disclosed that the Palace II Developments had a value of approximately  
equal to its liabilities;  
1660  
1661  
1662  
1663  
1664  
1665  
1666  
PW-565-7C-1  
PW-566-2  
PW-1103-2  
PW-1063-8  
PW-1103-5  
D-99A, page 7  
D-99A, page 8; see also PW-1108B, appendix E  
500-05-001686-946  
PAGE: 311  
•
Reflected MEC at a net investment value of $7 million.1667  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1547] Castor’s total exposure to MEC as of December 31, 1989 amounted to 147.5  
million:  
•
•
•
•
•
•
Loan 1100 : 55.5 million1668  
Loan 1109: 4.1 million1669  
Loan 1101: 10.1 million1670  
Loan 1103: 4 million1671  
Loan 1145 : 30.6 million1672  
1
673  
as part of the year-end reallocation of account 046,  
Loan 1042: 24.2 million  
1
674  
an additional amount of $10 million was put to loan 1042  
Loan 1095: 10.1 million1675  
•
•
•
Loan 1146: 1.3 million1676  
Loan 701,001/2001 : 7.6 million1677  
In t er es t s r ecogn is ed a s r even u e  
[
1548] In 1989, Castor recognized interests on the MEC related loans totalling  
1
678  
.
$
16,562,323.00 as revenue  
Conclusions  
1
1
1
1
1
1
667  
668  
669  
670  
671  
672  
PW-1149  
PW-1053-19, sequential pages 222-223  
PW-1053-19, sequential pages 224-225  
PW-1053-19, sequential pages 226-227  
PW-1053-19, sequential pages 226-227  
Ron Smith, September 15, 2008, p. 163; PW-1100B; PW-1105; PW-1053-19, sequential pages 228-  
2
29  
1
673  
674  
PW-1063; PW-1056-C; PW-1105  
1
Ron Smith, September 15, 2008, p.175; PW-85 ; PW-1053-19 sequential pages 24 and 26 and 211-  
2
12  
1675  
No LEQ was completed in 1989 but one was done in 1990 and confirmed there was no change to the  
loan balance – see PW-1053-15, sequential pages 294-295  
PW-1053-19, sequential page 97  
PW-1053-89, sequential page 235  
PW-1105  
1676  
1677  
1678  
500-05-001686-946  
PAGE: 312  
[
1549] The Court finds that Vance’s value of $261 million, in accordance with the  
content of the Royal LePage appraisal PW-1108, should have been used. Had  
Goodman used such a figure, and assuming he would have been right on all other  
figures, there would have been no surplus.  
1
679  
[
1550] This being said, given all evidence available  
but without agreeing to any  
specific components found in Goodman’s computations for MEC, the Court does not  
conclude that a LLP was required for the MEC project in 1989 - it was arguable that no  
LLP was required.  
TSH  
Experts’ positions  
[
1551] All plaintiff experts came to the conclusion that a LLP was required, their  
minimum LLP being:  
•
•
•
Vance : $29.3 million1680  
Froese: $31 million1681  
Rosen: $24.9 to $28.9 million1682  
[
1552] All plaintiff experts also concluded that loans should have been placed on a non-  
1683  
accrual basis.  
[
1553] Vance used the $93 million figure as value for the purpose of his calculations but  
he opined that by doing so he was clearly coming up with a minimal LLP:  
Q.- You've seemed to express some reservation with respect to the value that  
was given by the appraiser, considering amongst others this issue of the actual  
revenue versus the projections that were used. Did you use yourself the value of  
ninety-three (93) million in your calculation of the loan loss provisions?  
A.- Yes, I did. I am not able to... There is no other appraised value around. I was  
trying to get a... what I would call a minimum loan loss provision, so by using the  
ninety-three (93) million dollar value, that's, I guess, the best it can get insofar as  
value of the property goes and in addition to using the ninety-three (93) million  
dollars, I did not apply a loan-to-value ratio either, I didn't discount the value to  
1
1
1
1
679  
680  
681  
682  
Namely PW-1149 (value of $300 million for MEC as per YH- Whiting)  
Vance, April 8, 2008, pp. 165 and following  
Froese, January 27, 2009, pp. 94 and following; PW-2941-4 ;  
PW-3033; Rosen, February 4, 2009, pp.195 and following; Rosen, April 7, 2009, pp.169 and  
following; Rosen, April 22, 2009, pp.201 and following  
1683  
PW-2941, Vol. 2, p. 4; PW-2908, Vol. 1, p. 4-I-18 to 4-I-19; PW-3033, Vol. 2, Appendix A, p. 6.  
500-05-001686-946  
PAGE: 313  
eighty percent (80%) of the collateral, so that's why I say my provision is most  
certainly a minimum provision.1  
684  
[
1554] Goodman concluded that there was no need for a LLP but he severed his  
1685  
analysis of the Lambert loans totalling $39.4 million from the TSH indebtedness.  
Goodman evaluated the exposure of Castor to the TSH at $79.9 million only and he  
1
686  
therefore opined that there was a surplus of $9.9 million.  
1687  
[
1555] Had Goodman taken account of the Lambert loans totalling $39.4 million,  
Goodman would have come to a minimum deficiency figure of $ 29.3 million, same  
figure as Vance’s minimum LLP.  
1
989 events  
[
1556] The peak year for the hotel real estate market had been 1988 and it was not  
1688  
possible to obtain as good a price for any of the hotels in 1989.  
[
1557] An analysis of the value of TSH prepared by Prychidny at year-end 1989  
assumed that $10 million worth of renovations to the hotel were required and estimated  
1
689  
the realizable value of the TSH at $50 million.  
[
1558] The income pre-debt fell far short of the projected budgets and was insufficient to  
1690  
service the annual interest obligations.  
[
1559] Overdue 1988 realty taxes of $414,277 and 1989 realty taxes of $1,480,224  
1
691  
.
(
excluding interest and penalties) remained unpaid by June of 1990  
[
1560] The 1989 unaudited financial statements for Topven (1988) disclosed a deficit of  
692  
$
16,894,000.51.1  
1561] The figures in the month end report for the TSH for December 1989 disclose  
[
negative information about the TSH operations in 1989 : the decline in revenues over  
1
1
1
1
1
1
684  
685  
686  
687  
688  
689  
Vance, April 8, 2008, pp.145-146  
D-1312, p. 395  
D-1312, p. 398  
PW-1053-89, sequential page 249  
Prychidny, October 14, 2008, p. 218; November 4, 2008, pp. 243 – 245.  
PW-499C; PW-499C-1: The TSH’s monthly financial statements reported income pre-debt at year-  
end of $1.8M for 1988 (PW-424); $298,000 for 1989 (PW-429) and -$2M for 1990 (PW-430).  
PW-1084A and PW-424, bates p. 9; shows income pre-debt of $1.8M and a loss for the year of $9M  
1690  
(
this is a preliminary report but the figures are confirmed in PW-429, the 1989 statement with  
comparative figures for 1988); PW-1084B and PW-429, bates p. 14; PW-1084C and PW-430, bates  
p. 11.  
1
691  
692  
PW-447A-1.  
PW-433A.  
1
500-05-001686-946 PAGE: 314  
the year, the actual income pre-debt of $298,970 as compared to the budgeted amount  
1
693  
of $3.5M and the net income pre-debt of negative $14.5 million.  
[
1562] Cash circles were used to pay interest on Lambert’s loans.1694  
[
1563] The total accumulated deficit of the TSH owners (Topven, Topven (88) and  
1
695  
Lambert) as of December 31, 1989, was $71.2 million.  
Loans as of December 31, 1989  
[
1564] At December 31, 1989, $117.2 million were owed to Castor (CHL and CHIF) in  
relation to loans made in connection to TSH.  
Owed to CHL  
•
•
Loan 1107 - $40 million1696  
GL 066 (operating line) - $17.8 million1697  
Owed to CHIF  
•
•
•
Loan 888002/2003 - $20 million1698  
Loan 576000/3002 - $32.6 million1699  
Loan 576001/3009 - $ 6.8 million1700  
Interests recognised as revenue  
[
1565] $ 11,149,835.43 of capitalized interest on CHL loans 1107 and GL66 and on  
1701  
CHIF’s loan 888002/2003 was recognized as revenue in 1989.  
Appraisals 1989  
[1566] There was no new appraisal in 1989.  
1693  
1694  
1695  
1696  
1697  
1698  
1699  
1700  
1701  
PW-429  
Froese, January 27, 2009, pp. 66 and following; Levi, January 14, 2010, pp. 81 and following  
Froese, PW-2941, vol.2, paragraph 2.95; PW-444a and PW-444b  
PW-1053-19, sequential pages 171-173  
PW-1053-19, sequential pages 174-175  
PW-1053-89, sequential page 250  
PW-1053-89, sequential page 249  
PW-1053-89, sequential page 249  
PW-1081A  
500-05-001686-946  
PAGE: 315  
[
1567] C&L used the 1988 appraisal of $93 million.1702  
Conclusions  
[
1568] The comments and analysis made under the subheading relating to the TSH in  
the 1988 consolidated audited financial statements section of the present judgment  
apply mutatis mutandis to 1989.  
[
1569] The indebtedness increased and the value of the TSH did not. At best, the  
market value of the TSH was $93 million, but the evidence shows it was probably much  
less than $93 million.  
[
1570] Taking account of the best possible scenario as to market value (at $93 million),  
and the various figures proposed by all experts, Castor should have recorded at least a  
LLP of $ 24.2 million.1  
703  
CSH  
Experts’ positions  
[
1571] There is no dispute between the experts that there were material loss exposures  
in each of the years in connection with the CSH project. The issue in dispute is whether  
GAAP required that loan loss provisions be taken.  
[
1572] The Plaintiff’s experts identified the following minimum required LLP on the  
assumption that one could rely on the appraisal of the CSH:  
•
•
Vance : $18 million1704  
1
705  
or, as per cross-examination hypothesis, $12.7  
Froese : $13.4 to $27.2 million  
million to $ 26.4 million1  
706  
•
Rosen : $12.2 to $22.8 million1707  
[
1573] Plaintiff’s experts agreed that the loans should have been placed on a non-  
accrual basis. Moreover, the magnitude of the increase in Castor’s allowance for loan  
1
708  
losses created uncertainty as to Castor’s ability to continue as a going concern.  
1702  
1703  
1704  
1705  
1706  
1707  
PW-423  
Indebtedness of $117.2 million less best scenario of market value of $93 million  
PW-2908, Vol. 1, S-9  
PW-2941, Vol. 1, p. 25.  
PW-2941-4  
PW-3033, Vol. 2, Appendix G, p.3, Approach A (unadjusted figures).  
500-05-001686-946  
PAGE: 316  
[
1574] Using a property value of $50.3 million from which he deducted $2 million to  
1709  
However,  
cover renovations, Goodman calculated a loan deficiency of $20.2 million.  
and as he concluded for the 1988 audit and for the same reasons, he opined there was  
no need for a LLP in 1989.1  
710  
Additional evidence specific to CSH  
1
9 8 9 even t s  
[
1575] The hotel continued to lose significant amounts of money after debt service.1711  
C&L did review the 1989 financial statements of Skyview showing a loss for the year of  
1
712  
over $7 million and a cumulative deficit of $11.7 million.  
[
1576] The loan covenants were not respected by Castor’s borrowers and interest and  
fees were systematically capitalized.  
1713  
[
1577] The planned renovations mentioned in the PKF market study , and relied upon  
by C&L in their 1988 audit, were not yet done even though the assumption was that  
they would be completed by February 1988.  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1578] The same loans from Castor and CHIF (NV) loans to Skyview Hotels, Skyeboat  
and 321351 Alberta were in place in 1989, as in 1988, except that the loan balances  
had increased, primarily as a result of capitalized interest.  
[
1579] By December 31, 1989, Castor’s loans to 321351 Alberta and Skyeboat had  
increased and went from $7.9 million and $10.8 million, respectively, to $9.7 million and  
1
714  
.
$
12.1 million. The loan increases resulted primarily from capitalized interest  
[
1580] Interest on the $25 million first mortgage and $16 million second mortgage was  
accrued in the interest reserve account, with the result that the reserve was depleted.  
The balance went from a deposit of $1.7 million at the end of 1988, to $3.4 million owing  
1708  
1709  
1710  
1711  
1712  
1713  
1714  
PW-2908, Vol. 1, pp. S-8 to S-10; PW-2941, Vol. 2, p. 126; PW-3033, Vol. 2, Appendix G, p. 5.  
D-1312, p. 428  
D-1312, p. 430  
Prychidny, October 15, 2008, p. 175  
PW-467C  
PW-469  
PW-167Q and PW-167R.  
500-05-001686-946  
PAGE: 317  
to Castor by the 1989 year end. The balance in this account was reclassified to loan  
154 in February 19901  
715  
.
1
In t er es t s r ecogn is ed a s r even u e  
[
1581] The interest and fees recognized in respect of the CSH for 1989, which should  
1716  
have been reversed, were in the amount of $ 9.4 million.  
Conclusions  
[
1582] The comments and analysis made under the subheading relating to the CSH in  
the 1988 consolidated audited financial statements section of the present judgment  
apply mutatis mutandis to 1989.  
[1583] The indebtedness increased and the value of the CSH did not.  
[
1584] Taking account of the various figures proposed by all experts, Castor should  
1
717  
have recorded a material LLP relating to the CSH loans in 1989.  
OSH  
Experts’ positions  
[
1585] The only one of Plaintiff’s expert to opined on the OSH was Vance. He  
1718  
concluded that a LLP of $ 14.5 million should have been recorded by Castor in 1989.  
He also opined that all interest and fee revenue on the OSH loans should have been  
reversed.  
[1586] Vance came to that LLP taking into account the following information:  
•
•
Value of property after renovations completed : $ 29 million1719  
Value of Campeau’s interest: $16 million1720  
1715  
1716  
1717  
1718  
1719  
1720  
PW-167T.  
PW-2908, vol. 1, page S-9  
The lowest LLP calculated is Rosen’s minimum at $ 12.2 million.  
Vance, April 9, 2008, pp.41 and following, p.57  
Vance, April 9, 2008, pp. 46, 52  
Vance, April 9, 2008, p. 46  
5
00-05-001686-946  
Castor’s exposure : $14.5 million1721  
1587] Vance explained why he had come to this result as follows:  
PAGE: 318  
•
[
In nineteen eighty-nine (1989) and nineteen ninety (1990), the income that was  
generated by the property was not sufficient to cover the rent and therefore, this  
basis of taking the value and extracting the rent value out of it, you would come  
to a negative amount for the actual lease operations. You would be taking out  
more than was being generated and have no value, and that is representative by  
the financial statements of the Ottawa Skyline, that it did not have value, it was  
saddled with debt and so therefore, after the rent, then there was a huge interest  
charge that would be paid and they have large losses.  
So, in nineteen eighty-nine (1989) and ninety ('90), certainly the values used in  
the Fitzsimmons' appraisal, is predicating it on income after the rent of one  
million four hundred ninety-six thousand (1,496,000) or two million one hundred  
twelve thousand dollars ($1,112,000), and they're just not appropriate at all, so  
therefore, I have no basis to give it value and as the operations were running at a  
loss, if you were looking at the value of a business, calculating a value of a  
business that runs at losses, there really is no value.  
So therefore, the loan loss provisions in nineteen eighty-nine (1989) are fourteen  
million four hundred ninety-four thousand dollars ($14,494,000) or fourteen  
million five (14,5) and in nineteen ninety (1990), nineteen million one hundred  
eighty-two thousand (19,182,000) or nineteen million two hundred thousand  
1722  
19,200,000).  
(
The loan to that were again the shares of Skyline 80, which was the hotel, and  
when you came right back to it, the hotel, that certainly had no value, it was...  
deficits were growing, its operating losses were increasing and it just continued  
throughout the three (3) years to increase. In nineteen eighty-eight (1988) and  
eighty-nine ('89), there were its own financial statements and in nineteen ninety  
(
1990), it was sold in March to 687292, and I've prepared an exhibit, I think, PW-  
464-3, merely to combine the two (2) sets of financial statements to show the  
1
operating results, and the losses in nineteen ninety (1990) again that were... As  
before depreciation was six million two hundred and fourteen thousand dollars  
(
$6,214,000) and the deficits increased throughout that period. So, there really  
1723  
was no value accruing to the hotel, in fact it was deteriorating quite rapidly.  
1721  
1722  
1723  
Vance, April 9, 2008, pp. 55-56  
Vance, April 9, 2008, pp. 73-74  
Vance, April 9, 2008, pp. 75-76  
500-05-001686-946  
PAGE: 319  
[
1588] Defendants’ expert, Goodman, acknowledged that there was a deficiency in  
1724  
He came to that deficiency using the following  
Castor’s loan position of $ 3.9 million.  
values and exposure figures:  
•
•
•
•
•
Value of property : $33.8 million  
Costs of required renovations : $ 6 million  
Value of Campeau’s interest : $ 17 million  
Value available to Castor : $10.8 million  
Castor’s exposure : 14.7 million  
[
1589] Goodman used the Juteau appraisal instead of the Fitzsimmons appraisal which  
was commissioned by a third party and which provided specific details of the renovation  
costs to achieve the proposed values, and even though C&L had relied on the  
1
725  
Fitzsimmons appraisal for purposes of its 1989 audit.  
Additional evidence specific to OSH  
1
9 8 9 even t s  
[
1590] From 1988 onwards, Prychidny expressed to Stolzenberg that the OSH was  
worth nothing”.1  
726  
“
[
[
1591] In 1989, there was not enough income to pay the rent to Campeau.1727  
1592] Campeau repeatedly sent letters of default to YHHL, Skyline (80) and Castor.1728  
1593] There was insufficient revenue to pay any of the interest to Castor, and all  
[
1
729  
interest was capitalized.  
[
1594] As of December 1989, Wersebe and YH management respectively assessed the  
1730 1731  
and $15 million.  
market value of the leasehold at $10 million  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
1724  
1725  
1726  
1727  
1728  
1729  
1730  
1731  
D-1312, ES-28; D-1312, p. 459  
PW-1053-19, sequential page 244  
Prychidny, November 3, 2008, p. 40  
Vance, April 9, 2008, pp. 64, 73  
PW-450 series; Prychidny, October 15, 2008, pp. 145-153  
PW-1097  
PW-499C-1  
PW-499  
500-05-001686-946  
PAGE: 320  
[
1595] As of December 31, 1989, the following amounts were owed to Castor in relation  
to the OSH:  
•
•
Loan 1049 to Skyline 80 - $10.6 million1732  
Loan 11521733 - $ 4 million1734  
In t er es t s r ecogn is ed a s r even u e  
[
1596] $2,317,884.92 of capitalized interests were recognized as revenue in 1989.1735  
Conclusions  
[
[
1597] Vance’s opinion prevails.  
1598] It is not reasonable to use the Fitzsimmons appraisal figures in the  
circumstances, as Goodman did.  
[
1599] Moreover, the analysis and conclusions expressed under the subheading OSH in  
the 1988 consolidated audited financial statements section of the present judgement  
apply mutatis mutandis.  
TWTC  
Additional evidence specific to TWTC  
1
9 8 9 even t s  
[
1600] Castor’s exposure relating to loans secured through the TWTC project increased  
in 1989, from $47.7 million to $73.7 million.  
[
1601] 607670 Ontario Inc. (“607670”) a wholly-owned subsidiary of CHL, acquired all of  
the shares of 696604 Ontario Ltd. (“696604”) from Peter Luerssen, for $7,065,000.  
[
1602] 696604 owned 87 of the 213 units of the TWTCLP, which partnership had a  
8.375% interest of the TWTC project. Therefore, through the transaction, CHL  
acquired a further 7.506% interest in the TWTC project.  
1
1732  
1733  
1734  
1735  
PW-1053-19, sequential pages 245-247  
PW-452-1A; PW-1053-19, sequential page 99; PW-1053-15, sequential page 284  
PW-2908, vol. 3, page 55; D-1312, p. 454  
PW-1097  
500-05-001686-946  
PAGE: 321  
[
1603] As part of a loan to TWTCI, Castor was to obtain a legal opinion to the effect that  
the security had been duly executed and constituted a first charge on the borrowers’  
pledged assets.1  
736  
[
1604] In a legal opinion dated August 29, 1989, McLean & Kerr opined on the consents  
1737  
It also described that in the event of a default, the co-owner  
required for registration.  
could buy the co-ownership interest of York-Hannover at rebate. The co-ownership  
agreement between Camrost, YHDL and others clearly stipulated the aforesaid  
1
738  
consequence of a default by a co-owner.  
[
[
1605] Castor was unsuccessful in having its security interest perfected.1739  
1606] In September 1989, Castor was informed that YH’s 50% interest (assuming the  
exercise and payment of the option) would be $86.8 million for the land and 50% of the  
1
740  
YH estimated the net value of the three  
condominium value of $ 69.9 million.  
remaining office sites at $121 million based on a price of $100 per square foot.  
1
741  
[
1607] Commenting the condominium net value of $ 69.9 million, Ron Smith indicated  
that they were merely “estimates” and that the «profit numbers were pre-tax and, it  
should be noted that the profit is pledged towards the development of the office  
towers.»1 Ron Smith concluded as follows:  
742  
In conclusion, we should secure our position and attempt to get KVW to sell out  
and realize the present value of the project. While KVW maintains that each of  
the 3 development sites has potential for $30 to $40 million of additional profit, a  
lot of time, effort and strong equity support are required to get to this profit. It is a  
high risk scenario at this stage and I am not sure whether it is worth any more  
than what the present office pads are worth at present.”1  
743  
1
744  
prior to Coldwell  
[
1608] A value estimate as to the office tower lands was issued  
Banker being granted a mandate to sell such lands.  
[
1609] In December 1989, Coldwell Banker was mandated to attempt to sell the office  
tower lands for the sum of $145 million. Rapidly, it became apparent that such amount  
1
745  
could and would not be achieved.  
1
1
1
1
736  
737  
738  
739  
PW-1069-1.  
PW-1069-5.  
PW-1161-11.  
PW-1069-6, PW-1069-7, PW-1069-12, PW-1069-14, PW-1069-15, PW-1069-16, PW-1161-16, PW-  
1
161-17  
1740  
1741  
1742  
1743  
1744  
1745  
PW-1069-8.  
PW-1069-10  
PW-1069-10.  
PW-1069-10 ; see also Ron Smith, September 16, 2008, pp. 146-147  
PW-1161-24; PW-1161-23; Whiting, December 9, 1999, p. 146-147.  
PW-1161-30; PW-1161-31  
500-05-001686-946  
PAGE: 322  
[
1610] In a memo dated February 20, 1990, David Whiting reviewed the progress of the  
attempts to sell the land sites as discussed during a meeting that had taken place on  
1
746  
February 8, 1990. Whiting wrote the following conclusion:  
The general view was that we had not given the agents sufficient time.  
Markborough wants equity financing which JLW can assist with after their current  
trip. We will get a further update on the international scene shortly.  
Markborough’s price is unlikely to exceed $85 million. A development pro-forma,  
prepared jointly by the sales agents, is attached. The reduced value of $70sq/ft.  
to $90 sq/ft. is “explained” by Coldwell Banker as it being misinformed on the 40  
Bay streat deal. They believe Trizec/Bramelea renegotiated down to the $100  
sq/ft. range as well as different economic mood now from even late fall – soft  
landing has become doom and gloom.  
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1611] As of December 31. 1989, Castor’s exposure for loans relating to the TWTC  
1747  
:
amounted to $ 73.7 million  
•
•
•
•
•
•
•
Loan 1046 : $21 million1748  
Loan 1067 : $ 25.5 million1749  
Loan 1120/1149 : $12.3 million1750  
Loan 1090 : $ 6.5 million1751  
Investment in TWTCLP : $0.6 million  
Investment in 607670 Ontario Inc. : $7.1 million  
Accrued interests : $0.7 million  
[
1612] As of December 31, 1989, the security that Castor held for its loans was  
essentially a pledge of equity interests (as opposed to a mortgage on a property) which,  
1
752  
altogether, represented a 43.75% interest in the TWTC’s equity.  
1746  
1747  
1748  
1749  
1750  
1751  
PW-1161-31  
PW-2908, vol. II, pp. D-3 and D-4; D-1312, p. 210  
PW-1053-19, sequential pages 93, 189-190  
PW-1053-19, sequential pages 93, 191-192  
PW-1053-19, sequential pages 93, 193-194  
PW-1053-19, sequential page 98  
500-05-001686-946  
PAGE: 323  
Exp er t s ’ p os it ion  
[1613] Vance did not recommend a LLP in the following circumstances:  
PW-1161-24, which is a value estimate of Phases I and II, was produced by  
David Whiting on December 9, 1999 from the boxes of the Trustee in Bankruptcy  
of York-Hannover Developments Ltd. This document was not available to C&L as  
it did not form part of the books and records of Castor. Had C&L made further  
inquiries in 1989 regarding the “offer” and determined the existence of this  
document, they would, in our opinion, have been justified in applying the  
provisions of section 5360 of the Handbook (PW-1419-2A) with respect to this  
estimate of value and only once these procedures would have been satisfactorily  
completed, the value estimate could then have been applied to the land sites with  
the result that a loan loss provision would not have been required. Consequently,  
owing to the uncertainty regarding the value of the land sites and whether this  
value could flow to castor, and as the financial statements were materially  
misstated and misleading because of other matters raised in this report, we have  
no longer provided for a loss on the loans secured by the Toronto World Trade  
1753  
Center.  
[
[
1614] Rosen recommended a LLP based on different methodologies.1754  
1615] Goodman opined that the collateral security value supporting Castor’s loans  
amounted to $104 million as at December 31, 1989 and that there was, therefore, a  
surplus of $30.3 million.1  
755  
Conclusions  
[
1616] As proposed by Vance, the Court concludes that it could be that no LLP was  
required in relation to loans secured by the TWTC project in 1989.  
[
1617] However, the Court rejects Goodman’s suggestion that there was a surplus  
available to Castor against which Castor could have cured deficiencies of other loans. In  
the circumstances above described, this suggestion does not hold water.  
[
1618] Moreover, the analysis and conclusions expressed under the subheading  
TWTC” in the 1988 consolidated audited financial statements section of the present  
“
judgment apply mutatis mutandis.  
Meadowlark  
1752  
1753  
1754  
1755  
Goodman, September 23, 2009, p. 180  
PW-2908, vol. II, pp. D-14 and D-15  
PW-3033, vol II, section E, pp. 21-31  
D-1312, p. 214  
500-05-001686-946  
PAGE: 324  
Additional evidence  
1
9 8 9 even t s  
[1619] The situation did not improve in 1989.  
[
1620] The interests were capitalised 50%-50% in account 046 and under Raulino’s grid  
1756  
The borrowers were not complying with their loan covenants.  
note.  
[
1621] In January 1989, Castor was informed by YH that BMO had transferred the first  
mortgage loan to its work out group. According to the assessment of YH, Meadowlark  
1
757  
was «in extreme danger of complete disaster».  
[
1622] Castor continued to fund taxes owed by Meadowlark as well as operating  
1758  
expenses and mortgage payments to BMO.  
[
1623] Various letters of intent and offers received for Meadowlark fell short of the  
amount that would have been necessary for Castor to recover its loan : the amounts  
1
759  
offered during 1989 varied from $10 million to $14.5 million.  
[
1624] As of December 31, 1989, an amount of $ 15.6 million was due to the BMO, the  
first mortgage creditor.  
1625] Castor recorded a LLP of $1.2 million in 1989.1760  
[
Loa n s a s of Decem ber 3 1 , 1 9 8 9  
[
1626] Castor’s exposure to loans relating to the Meadowlark shopping center  
1761  
amounted to $ 8.3 million as of December 31, 1989.  
•
•
•
•
Loan 1030 : $ 7 million1762  
Loan 1117 : $0.6 million1763  
Amount receivable from 332756 Alberta : $ 0.6 million  
Accrued interest on Castor loans : $ 0.1 million1764  
1756  
1757  
1758  
1759  
1760  
1761  
1762  
1763  
1764  
PW-103, PW-1112G  
PW-1112-10  
PW-1112-8B; PW-1112-12;  
D-1002; D-1005; D-1194; D-1312, p. 254  
PW-1053-19, sequential pages 88, 89,  
D-1312, p. 259  
PW-1053-19, sequential page 200 - 202  
PW-1053-19, sequential pages 89, 95, 100  
PW-1053-19, sequential page 200  
500-05-001686-946  
PAGE: 325  
In t er es t r ecogn ized a s r even u e  
[
1627] The amount of $ 1,057,120.57 of interests was recognized in 1989 on the loans  
1765  
relating to Meadowlark.  
Exp er t s ’ p os it ion s  
[
1628] Rosen was the only expert mandated by the Plaintiff to opine on the Meadowlark  
project. He opined that a LLP was required for the total amount owed to Castor and that  
1
766  
the revenue recognised should have been reversed.  
1
767  
but to conclude  
[
1629] Goodman opined there was a deficiency of only $0.7 million  
accordingly, he assessed the value of the shopping center at $22 million and took  
account of the LLP of $1.2 million taken by Castor.  
[
1630] Goodman added that there was no need for a LLP because there were surpluses  
1768  
available elsewhere within the YH group to offset against the Meadowlark deficiency.  
Conclusions  
[1631] Rosen’s opinion must prevail.  
[
1632] A LLP representing the total amount due to Castor should have been taken.  
Moreover, because there was clearly no reasonable assurance of the collectability of  
the interest on these loans, the amount of $1,057,120.57 of recognized interests should  
have been reversed in 1989.  
[
1633] The value of the Meadowlark shopping center was not and could not be $22  
million. The appraisals of the Meadowlark shopping center were based on unrealistic  
occupancy levels which were not being met. The offers received during 1989 varied  
from $10 to $14.5 million, while the amount due to the first ranking creditor, BMO, was  
$
15.6 million.  
[
1634] Leeds could not pay the amount of $ 0.6 million and Castor took a LLP. In those  
circumstances, Castor could not reasonably expect Leeds to be able to pay a greater  
amount of $ 7 million.  
[
1635] Moreover, Goodman’s theory of surpluses available does not hold water taking  
into account Castor’s own doings: Castor took a LLP of $1.2 million. On that topic of  
Goodman’s theory of available surpluses, all previous comments made by the Court  
apply mutatis mutandis.  
1765  
1766  
1767  
1768  
PW-1112G  
PW-3033, vol. II section F; PW-1112 G  
D-1312, p. 259, 261  
D-1312, p.261  
500-05-001686-946  
PAGE: 326  
1990 financial statements  
Some specific facts of 1990  
[
1636] By year-end 1990, Castor needed to cover about $40M of accrued interest and  
other advances due by YH. C&L was clearly aware of the extent of interest  
capitalization.1  
769  
[
1637] The Canadian and the American economy entered into a recession: the  
Canadian economy went into recession in the second quarter of 1990 and the American  
1
770  
economy followed in the third quarter of 1990.  
Some figures and notes content of the 1990 statements  
[1638] According to its balance sheet, Castor had:  
•
$1.689,973 of investments in mortgages, secured debentures and advances, as  
more fully disclosed in notes 2, 3, 4 and 10;  
•
$100 000 of liabilities through debentures, as more fully disclosed in note 6.  
[
1639] According to the consolidated net earnings statement, Castor’s revenues for  
990 were $259,246 000, as more fully disclosed in note 9, and Castor’s net earnings  
for 1990 were $31,200 000.  
1
[1640] According to note 10 on related party transactions:  
•
•
secured debentures and advances due from shareholders in the amount of  
16,101 000$ were included in investments, in mortgages, secured debentures  
and advances; and  
transactions during the year, and amounts due to or from shareholders and  
directors, not otherwise disclosed separately in the financial statements, were as  
follows:  
o accrued interests and other payables : $2,461 000  
o interest revenue : $1,332 000  
o other expenses: $380 000  
1
769  
770  
PW-1053-87 sequential pages 32-33 – see also PW-1053-19, E-55A and E-59 (1989), PW-1053-3-1  
and PW-1053-76-1 and Vance, March 10, 2008, pp.53 and following  
1
D-1341, p. 16; Lapointe, October 13, 2009, pp.118-119, 137,  
500-05-001686-946  
PAGE: 327  
[
1641] Notes 2, 3, 4, 6 and 9 read as follows:  
2.  
Investments in mortgages, secured debentures and advances  
The investments in mortgages, secured debentures and advances are in various currencies and bear interest at  
varying rates from 7 1/2% to Canadian bank prime rate plus 6% per annum and mature as follows:  
1990  
1989  
1990  
1991  
1992  
1993  
1994  
1995  
-
1,055,702  
121,799  
84,253  
157,460  
4,416  
1,321,314  
181,800  
173,525  
12,550  
784  
421  
and subsequent  
years  
—
———————  
————————  
——-  
—
—
1,689,973  
1,424,051  
3.  
Notes payable  
(
a) These notes are payable in various currencies and bear interest at varying rates from 7 1/16% to 15 ¼% and  
mature as follows:  
1990  
1989  
1990  
1991  
1992  
1994  
-
549,815  
24,500  
60,158  
11,000  
689,616  
122,966  
11,000  
—
———— ————————  
—
——  
—
823,582  
645,473  
(b) Mortgages amounting to $240,806 have been pledged as security for secured notes payable totalling $244,115.  
500-05-001686-946  
PAGE: 328  
4.  
Bank Loans and advances  
(
a) Bank loans and advances consist of term loans and advances bearing interest at floating rates and varying fixed  
rates from 8 1/8% to 15 3/16% per annum.  
(b) The term loans and advances mature as follows:  
1
990  
1989  
375,993  
104,124  
35,069  
1990  
1991  
1994  
-
519,713  
42,078  
—
—————  
—————————  
—
—
———  
561,791  
515,186  
(c) Mortgages amounting to $244,375 have been pledged as security for bank loans totalling $243,000.  
6.  
Debentures  
1
990  
1989  
$
$
(
a) Debentures maturing on June  
50,000  
50,000  
3
0, 1997 bearing interest payable  
semi-annually at The Royal Bank  
of Canada prime rate plus 2 ¼%  
but not less than a minimum of  
1
1% per annum. After June 30,  
992, the company has the right  
1
to prepay the principal amount..  
(
b) Debentures maturing on June  
50,000  
50,000  
3
0, 2002 bearing interest payable  
semi-annually at The Royal Bank  
of Canada prime rate plus 2 3/8%  
but not less than a minimum of  
1
1% per annum. After June 30,  
994, the company has the right  
1
to prepay the principal amount.  
—
—————————  
-
———————————  
100,000  
500-05-001686-946  
PAGE: 329  
100,000  
9.  
Revenue  
Details of revenue are as follows:  
1
990  
1989  
$
$
Interest  
247,935  
11,086  
225  
183,793  
13,579  
339  
Commissions  
Share from  
of  
revenue  
investments and joint ventures  
—
—————————  
-
———————————  
197,711  
259,246  
Materially misstated (1990)  
[1642] The 1990 audited financial statements were materially misstated.  
Absence of a SCFP showing the sources and uses of cash and cash  
equivalents  
[
1643] A SCFP was required: section 1540 and its italicized recommendations were  
clear.  
[
1644] The analysis developed and the conclusions enunciated in the 1988 and 1989  
financial statements sections of this judgment apply mutatis mutandis.  
Undisclosed related party transactions  
[
1645] No doubt related party transactions were undisclosed in the 1990 financial  
statements. The analysis developed and the conclusions enunciated in the 1988 and  
the 1989 financial statements sections of this judgment apply mutatis mutandis.  
[
1646] Above and beyond the situations discussed in the 1988 and the 1989 sections of  
this judgment, the transfer of CHL’s loan 1049 to 687292 (which purchased YH’s  
interest and debts in relation to the OSH) clearly constitutes an undisclosed related  
party transaction.  
500-05-001686-946 PAGE: 330  
[
1647] Prychidny testified that when the Skyline (80) interest was transferred to 687292,  
«
there was no resistence by either Mr. von Wersebe or David Whiting. It was actually a  
sense of relief I got from Mr. Whiting, because the transferring included a transfer of  
Castor debt … so they were getting rid of, I guess you can say, a lease situation that  
couldn’t pay the rent...».1  
771  
[
1648] 687292 was a Wost company. Its President was Stolzenberg and all ownership  
1772  
The public corporate records clearly indicated  
decisions were made by Stolzenberg.  
that Stolzenberg was a director and officer of this company.  
Artificial improvements of liquidity and undisclosed restricted cash  
[
1649] Castor’s liquidity was artificially improved in the 1990 consolidated audited  
financial statements as a result of the following elements:  
•
•
The maturities used in notes 2, 3 and 4;  
The 100 million debenture transaction;  
•
The undisclosed restricted cash in the amount of $58 million ($50 US).  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Plaintiff  
[
1650] Plaintiff argues that:  
•
•
The Notes 2, 3 and 4 to the 1990 consolidated audited financial statements were  
materially misleading and disclosed a false picture of liquidity matching and  
solvency.  
The maturity notes conveyed to the reader that there was good maturity  
matching but in reality, it was the opposite. There was no reasonable expectation  
that the loans included as “current” would be, or could be, repaid during the  
current year.  
•
The maturity dates of various assets (loans receivable) and liabilities (loans  
payable) were altered during the audit; changes, unsupported by audit evidence,  
were accepted by C&L to the maturity dates. By advancing the due date of  
1
771  
772  
Prychidny, October 15, 2008, p. 156.  
1
O’Connor, January 14, 2009, pp. 61-70, 79-80; R. Smith, September 5, 2008, p. 179; Prychidny,  
October 15, 2008, p. 157; PW-292.  
500-05-001686-946  
PAGE: 331  
various receivables before their actual due dates and by extending the due date  
of various liabilities beyond their actual due dates, Castor improved its apparent  
liquidity position.  
Defendants  
[1651] Defendants argue that:  
•
Plaintiffs’ experts have misread the notes to the financial statements.  
o Vance and Rosen have asserted that these notes were misleading  
because they were possibly incorrect with respect to the amounts shown  
as maturing in future years, and because they misled the reader into  
believing that Castor was going to receive as much as 70-80% of its  
revenue in cash within the next year, whereas in reality, Castor’s assets  
were not that liquid.  
o Rosen described the mismatch as being between long-term lending and  
short-term borrowing.  
•
•
Plaintiffs’ experts are attempting to read something into the financial statement  
notes that is not there, nor required to be there. Rosen and Vance confused the  
concepts of “maturity” and “liquidity”.  
Plaintiff failed to demonstrate that the disclosures as to contractual maturity dates  
made in the 1990 financial statements were not materially correct.  
Maturity changes made in 1990  
1773  
1652] $98.8 million of maturity date changes were made by C&L in 1990 . All  
[
changes concerned CHIF notes payable to Bristol and Tara. The maturity on the Bristol  
note in the amount of $ 87.7 million (£39,193,721) was changed from 1991 to 1992; the  
maturity on the Tara notes in the amount of $11 million was changed from 1991 to  
1994.  
Specific additional evidence  
Br is t ol Not e  
[
1653] The maturity listing showed the Bristol note to be maturing on March 31,  
1774  
991.  
1
1
773  
PW-1053-71-3  
1774  
PW-1053-88-5, sequential page 100  
500-05-001686-946  
PAGE: 332  
[
1654] The photocopy of the confirmation letter contained in the files of C&L indicates a  
1775  
by Bänziger on behalf  
maturity date of March 31, 1991 and the signed confirmation  
of Bristol also includes a March 31, 1991 maturity date.  
[
1655] On working paper AA-511776, a notation is made that according to Mr. Gross,  
there were no long-term loans, other than the one to Hertel.  
[
1656] However, in a letter of February 8, 1990 requesting changes to maturity dates for  
the 1989 audited financial statements, Bänziger had stated that the Bristol deposit was  
connected to a receivable from Marketchief maturing only in 1992 and that,  
consequently, it could not be called for earlier.  
Ta r a Not es  
1
777  
is 99.99.99,  
[
1657] The inscription relating to the Tara notes in the maturity listing  
which indicates an amount without a fixed maturity date, and payable on demand.  
[
1658] The unsigned confirmation letter in respect of the Tara notes payable in the file of  
1778  
indicates a maturity date of 31.12.90, the fiscal year-end.  
C&L  
[
1659] Throughout the Tara deposit folders, starting from the inception of the deposits,  
all documentation refers to “call deposits”, deposits due on demand.  
[
1660] Gross observed that the Tara notes that he was shown were not drawn in the  
1779  
.
usual Castor format  
Experts’ opinions  
[
1661] Vance opined that C&L should not have accepted the changes since no  
corroborative audit evidence supported the reclassification of the maturity dates, while  
the evidence obtained supported the original maturity dates.  
[
1662] In the Bristol case, Selman opined that the available agreements were not  
1780  
for C&L to require a legal opinion before accepting the right to  
sufficiently unclear  
offset.  
[
1663] In the case of the Tara notes, unless the notes shown to Gross were not signed  
1781  
notes in the hands of the White , Selman was not prepared to accept that their 1994  
maturity dates were wrong.  
1775  
1776  
1777  
1778  
1779  
1780  
PW- 1134, bates #2561  
part of PW-1053-88-4  
PW-1053-88-5, sequential page 116  
PW-1053- 82-1  
Gross, pp.588-590  
PW-2214-A and PW-2115  
500-05-001686-946  
PAGE: 333  
Conclusions  
[
1664] Given Castor’s global situation, including the purposes and the content of notes  
, 3 and 4, Vance’s opinions prevail. The analysis developed and the conclusions  
2
enunciated on this topic in the 1988 and 1989 financial statements sections of this  
judgment apply mutatis mutandis.  
Liquidity improvements (100 million debentures)  
[
1665] In 1990, Stolzenberg signed the confirmation letter to C&L for the Morocco loan  
and on behalf of Morocco.  
[
1666] The analysis developed and the conclusions enunciated on this topic in the 1988  
and 1989 financial statements sections of this judgment apply mutatis mutandis.  
Undisclosed restricted cash  
[
1667] Castor had an unclassified balance sheet in its 1990 financial statements which  
included the heading “Cash in bank and short-term deposits”.  
[
1668] GAAP required that «cash subject to restrictions that prevent its use for current  
1782  
purposes» be excluded from current assets.  
[
1669] Without any note disclosure, a reader of the financial statements would assume  
that the amount shown under the heading “Cash in bank and short-term deposits” was  
1
783  
all available and usable for general purposes . It was not the case.  
Positions (in a nutshell)  
Pla in t iff  
[
1670] Plaintiff argues that $58 million ($50 US) of restricted cash resulted from the  
transactions that took place at year-end involving CHIF, Fitam and two branches of  
Bank Gotthard and should have been disclosed as such in the consolidated audited  
financial statements.  
Defen d a n t s  
[
1671] If the Court finds there was a valid pledge in place at December 31, 1990,  
Defendants agree it should have been disclosed.  
1781  
1782  
1783  
D-327 and D-329  
PW-1419-2, section 3000 “cash”  
PW-1419-2, section 3000; Vance, March 13, 2008, p.29.  
500-05-001686-946  
PAGE: 334  
[
1672] However, Defendants allege that the circumstances of this pledge were unusual  
and lead to a serious doubt as to whether it was valid and in place as at December 31,  
990 or whether it was back-dated.  
1
•
It appears that Gambazzi signed the document on Castor’s behalf, which is very  
unusual. Although he frequently signed on behalf of Castor’s customers, he did  
not have signing authority for commitments of this nature, nor was he a  
recognized signatory for the transactions between Castor and Bank Gotthard  
generally1  
784  
.
•
•
The ostensible authorization for this transaction is not found in a Board  
resolution, but in a December 24, 1990 letter to Bank Gotthard in Lugano, signed  
by Stolzenberg alone, purporting to give Gambazzi the authority to sign on behalf  
1
785  
.
of both CHIFNV and Castor  
Confirmation replies signed by two vice-presidents from Bank Gotthard in  
1
786  
.
Nassau and in Lugano do not refer to a pledge  
Additional evidence relating to restricted cash in 1990  
[
1673] In late 1990, Castor deposited $50 million with Bank Gotthard at its Nassau  
branch. A General Pledge and Assignment with respect to US$50 million of cash was  
1
787  
signed to secure a loan made by Bank Gotthard to Fitam Établissement , a company  
1
788  
controlled by Marco Gambazzi .This pledge was not found in Castor’s records but it  
1
789  
.
was obtained through an examination on discovery in the Bank Gotthard’s file  
[
1674] In a letter dated December 24, 1990 addressed to Bank Gotthard in Lugano and  
signed by Stolzenberg, Castor confirmed Gambazzi’s authority to sign on behalf of both  
CHIF and Castor.1  
790  
[
1675] Gambazzi remembered he had met with Mordasini from Bank Gotthard.1791  
1676] Only 2 persons had the authority to sign on behalf of Fitam Établissement:  
[
1
792  
Gambazzi and his employee Conti.  
1784  
1785  
1786  
1787  
1788  
1789  
1790  
1791  
1792  
D-659 (re: 4.5.10.17) A  
D-659-1 (re 4.5.10.17) B)  
PW-1134 bates 2523 and APG-5-27B  
PW-1053-87-23-1  
Gambazzi, February 26, 1996, p.109  
Gourdeau, Jan. 31, 2008, p. 43-47; Vance, June 6, 2008, p. 68-69;  
D-659-1 (re 4.5.10.17B)  
Gambazzi, February 10, 1998, p.216  
Gambazzi, February, 26, 1996, p.111 ; Gambazzi, February 10, 1998, p.223  
500-05-001686-946  
PAGE: 335  
[
1677] Gambazzi acknowledged that a loan agreement between Bank Gotthard and  
Fitam, for the amount of US$50 million and dated December 24, 1990, had been signed  
by his employee Conti1 on behalf of Fitam.  
793  
[
1678] At the beginning, Gambazzi was denying that the signature on the pledge, on  
1794  
but he became doubtful as counsel was showing  
behalf of CHIF, was his signature,  
him further documents. He even said “Il est possible que ce soit la mienne” and “Ça  
1
795  
ressemble à la photocopie de ma signature ça, il n'y a pas de doute » . Denial of  
signature by Gambazzi is found neither credible nor reliable.  
[
1679] Gambazzi signed a confirmation on behalf of Fitam that there was a US$ 50  
1796  
million deposit of Fitam with CHIF.  
[
1680] Confirmation requests were sent to both branches of Bank Gotthard, Lugano and  
Nassau. Replies were signed by two vice-presidents from Bank Gotthard, one in  
1
797  
Nassau and one in Lugano . The confirmation form sent to Nassau was a statement  
of open position. The vice-president of the Nassau branch confirmed that the  
information appearing on the statement of open position was accurate, but he did not  
refer to a pledge since it was not mentioned and since he was not required to set out  
any pledge or encumbrances on the deposits held by the Bank.1798  
[
1681] On January 28, 1991, the US$ 50 million deposit was cashed and used by CHIF  
to repay Fitam.  
Exp er t s ’ evid en ce  
[
1682] Vance opined there was a misstatement as a result of the non-disclosure of  
restricted cash in the amount of US$ 50 million. Vance explained that C&L should have  
been able to determine that said cash was restricted if they had followed proper audit  
procedures, controlled the confirmation process and sent a proper bank confirmation  
form.1  
799  
[1683] In his report, Defendants’ expert Selman described the transaction as follows:  
«
In my view, the transaction has all the earmarks of a classic instance of window  
dressing – to show an improved cash position by borrowing and holding the loan  
proceeds as cash on deposit.»1  
800  
1793  
1794  
1795  
1796  
1797  
1798  
1799  
1800  
Gambazzi, February 10, 1998, pp.217-218  
Gambazzi, February 10, 1998, pp.218-219  
Gambazzi, February 10, 1998, pp. 219-225  
PW-1134, bates 2533  
PW-1134 Bates 2523 and APG-5-27B  
PW-1134 Bates 2523  
PW-2908, Vol. 1, p. 6-32; Vance, March 13, 2008, pp. 46-47, 59-61  
D-1295, p. 340, para. 6.12.24.  
500-05-001686-946  
PAGE: 336  
[
1684] Selman opined that if a pledge was in force on December 31, 1990, there was a  
restriction on the cash on deposit at the Nassau branch of Bank Gotthard which should  
1
801  
have been noted in the consolidated audited financial statements of Castor.  
[
1685] Defendants’ expert Levi agreed that there were a misstatement and a disclosure  
1802  
and concluded that the failure to disclose  
failure with respect to Bank Gotthard,  
1
803  
.
same resulted in the financial statements being misleading  
[
1686] Levi takes the position that the bank acted to conspire with Stolzenberg to inflate  
the cash position at year-end 1990 with the intent «to deceive the investors as well as  
the auditors» because it failed to confirm to the auditors that the funds were  
restricted.1  
804  
[
1687] As admitted by Levi, the effect of undisclosed restricted cash would be to  
artificially improve the liquidity position of Castor, a matter which «would be of utmost  
1
805  
importance to investors and creditors».  
Conclusions  
[
1688] The Court concludes that Gambazzi signed a pledge on behalf of Castor to the  
benefit of Bank Gotthard and that such pledge was in place as of December 31, 1990.  
[
1689] The US$50 million pledged by Castor to secure a loan by Bank Gotthard to  
1806  
was restricted cash and had to be disclosed as such on Castor’s audited  
Fitam  
financial statements for 1990.  
[
1690] This transaction artificially inflated Castor’s cash position as at December 31,  
1
990 and constituted a material misstatement.  
Undisclosed Capitalised interest and inappropriate revenue recognition  
[
1691] In its 1990 brochure, Castor described its business in the same fashion as it had  
1807  
In reality, Castor’s business was quite different.  
during the previous years.  
[
1692] The books and records provided to C&L, in Montreal and overseas, again  
disclosed the nature of Castor’s loans and the fact that very little cash – if virtually no  
cash – was being paid by Castor’s borrowers.  
1801  
1802  
1803  
1804  
1805  
1806  
1807  
D-1295, p. 340, paragraph 6.12.25  
Levi, January 28, 2010, pp. 38–39; February 2, 2010, p. 97.  
Levi. January 28, 2010, pp. 37-38.  
D-1347, pp. 181–182.  
D-1347, p. 170.  
PW-1053-87-23-1.  
PW-1057-3  
500-05-001686-946  
PAGE: 337  
[
1693] Again in 1990, a huge amount of capitalized interest was unplanned capitalized  
interest further to non-compliance with loan covenants which were nevertheless  
recognized as revenue.  
[
1694] The analysis developed and the conclusions enunciated on this topic in the 1988  
financial statements section of this judgment apply mutatis mutandis.  
[
1695] Disclosure of capitalization of interest should have taken place and a huge  
amount of capitalized interest should not have been recognized as revenue.  
Understatement of LLP and overstatement of carrying value of Castor’s  
loan portfolio and equity  
[
1696] In 1990, Castor represented a carrying value of loans (investments in mortgages,  
secured debentures and advances) of $1,689, 973 in its audited financial statements: it  
represented that the figure of $1,689, 973 was the lower of estimated realizable value  
and cost.  
[
1697] At December 31, 1990, could the carrying value of loans, at the lower of  
estimated realizable value and cost, be $1.689, 973 or an amount close enough to  
1,689, 973 to avoid a material misstatement?  
$
[
1698] The obvious conclusion is that it could not be, taking into account the facts as  
they unfolded, as they shall be viewed and analyzed in the context of the relationships  
that existed between Castor and YH and Castor and DT Smith.  
[
1699] Assessing the exact quantum of any LLP that might have been required for 1990  
is neither achievable nor necessary. This litigation is not about what the precise content  
Castor’s financial statements for 1990 should have been – it is about whether or not  
C&L’s 1990 audited financial statements of Castor presented fairly the financial position  
of Castor in accordance with GAAP, as they purported to do.  
Positions in a nutshell  
[
1700] Plaintiff and Defendants positions, summed-up in the 1988 audited financial  
statements section of the present judgment, apply mutatis mutandis.  
[
1701] Plaintiff argues that a minimum LLP of $331.5 million1808 should have been  
taken.  
[
1702] Plaintiff argues that it was clear and known to Castor and to C&L that the  
Canadian and American economies were at least going through a slowdown, if not a  
1
808  
This is the lowest figure mentioned by Froese while his proposed LLP (mi-point) is in the amount of  
382.7 million – see PW-2941-4  
$
500-05-001686-946  
PAGE: 338  
recession. Plaintiff adds that Castor and C&L had to take that factor into account to  
properly assess LLPs.  
[1703] Defendants argue that there was no need for a LLP.  
[
1704] Defendants add that one needs to be very careful not to use hindsight to assess  
the 1990 situation. They plead that it was neither known to Castor and to C&L nor  
forecasted by them that the Canadian and the American economies were in recession  
in 1990. At best, Castor and C&L felt there was a temporary slowdown. They maintain  
1
809  
that the market turned only in 1991.  
Experts’ figures  
[
1705] Taking into account an amount of 7.7 million of LLP recognized by Castor, Vance  
proposes a total minimum LLP of $454.8 million. His total figure of $462.5 million  
1
810  
:
(
before LLP recognized by Castor) breaks down as follows  
Project/Category  
Vance’s proposed minimum LLP  
73 million  
MLV  
YH Corporate loans  
165.8 million  
including the “nasty nine”  
MEC  
TSH  
65 million  
51.5 million  
32 million  
19.2 million  
56 million  
CSH  
OSH  
DT Smith  
[
1706] Vance also mentions that his LLP would have been reduced to $328.3 million if  
the capitalized interest and placement fee revenue, in the amount of $126.5 million, had  
been reversed.1  
811  
1
809  
810  
Defendants’ written submission July 8, 2010, pp.205-208  
PW-2908, volume 1, page S-10  
1
500-05-001686-946  
PAGE: 339  
[
1707] Rosen proposes LLP ranges between $ 447 million and $ 672 million, breaking  
1812  
:
down as follows  
Project/Category  
Approach A - Approach A-  
Approach B- Approach B-  
Low  
High  
Low  
High  
MLV  
75.7 million  
171 million  
94.2 million  
210 million  
115 million  
171 million  
115 million  
210 million  
YH Corporate loans  
including the “nasty  
nine”  
MEC  
TSH  
67.1 million  
43.3 million  
22.8 million  
62 million  
5 million  
84.1 million  
51.3 million  
33.4 million  
78 million  
5 million  
143.1 million  
63.3 million  
34.8 million  
62 million  
147.8 million  
71.3 million  
45.4 million  
78 million  
CSH  
TWTC  
Meadowlark  
5 million  
5 million  
[
1708] Froese proposes LLP ranged between $331.5 million and $433.9 million,  
1813  
:
breaking down as follows  
Project/Category  
Low  
High  
MLV  
62.1 million  
90 million  
62.1 million  
96.1 million  
YH Corporate loans  
1811  
1812  
1813  
PW-2908, volume 1, page S-10  
PW-3033, volume 2  
PW-2941-4; PW-2941, volume 1, p. 25  
5
00-05-001686-946  
PAGE: 340  
40 million  
The “Nasty nine”  
40 million  
14.9 million  
21.2 million  
57.8 million  
45.5 million  
MEC  
CSH  
74.5 million  
36.1 million  
76.1 million  
49 million  
TSH  
DT Smith  
[
[
[
1709] Goodman opines that no LLP was needed.  
1710] Goodman applied his 5 step methodology (previously described).  
1711] Again, the more serious dispute between Plaintiff’s’ experts and Goodman is with  
respect to the value used for step 1 and the proper application of step 5 under GAAP,  
given Castor’s reality and the realities of Castor’s borrowers.  
Evidence – State of the Canadian and the American economies at the end of 1990  
[
1712] Defendants presented expert evidence on this topic through their expert witness  
Alain Lapointe (“Lapointe”). Plaintiff cross-examined Lapointe and elected not to call an  
expert witness in rebuttal.  
Lapointe  
Wh o’s wh o  
[
1713] In 1967, Lapointe obtained a Bachelor’s degree in economics from Laval  
University. In 1969, he obtained a Master’s degree in economics from the same  
University.1  
814  
[
1714] In 1971, Lapointe obtained a Master’s degree in economic science from  
1815  
Harvard.  
[
1715] In 1978, Lapointe obtained a Doctorate in economic science from the University  
1816  
of Toulouse, France.  
[
1716] From 1978 onwards and until he retired from teaching in 2006, Lapointe  
1817  
occupied various teaching positions with various universities and business schools.  
1814  
1815  
1816  
D-1342, p.1  
D-1342, p. 1  
D-1342, p. 1  
500-05-001686-946  
PAGE: 341  
[
1717] During his career, Lapointe has been consulted by various companies and  
1818  
institutions on various topics relating to the economy.  
[
1718] Lapointe has published numerous articles, research and books relating to  
1819  
economy and he has been invited as speaker at numerous professional events.  
[
1719] However, before he was asked by Defendants to opine in this case, Lapointe had  
never acted as an expert witness on the topic of the economic environment of the real  
1
820  
estate market in Canada during the relevant years (1988, 1989 and 1990).  
Object ion s a n d ju d gem en t r en d er ed on Decem ber 7 , 2 0 0 9  
[
1720] On October 13, 2009, further to representations made by counsel for the Plaintiff  
and for the Defendants, and subject to the “objection sous réserve # 84”, the Court  
authorized Lapointe to express opinions as follows during his testimony:  
Communiquer dans le cadre de son témoignage des avis relativement à  
l'évolution historique et à l'environnement macroéconomique du marché  
immobilier pour les années 1985 à 1992, et plus spécialement pour les années  
1
990 et 1991, début de l'année, et à présenter les prévisions des analystes sur  
1821  
l'économie et le marché immobilier pour cette même période.  
[
1721] On October 13, 2009, Plaintiff’s counsel objected to a part of Lapointe’s written  
1822  
report and the objection was noted as “objection sous reserve # 85”.  
[
1722] On December 7, 2009, the Court rendered judgment on these two objections.  
•
Objection sous réserve # 84 was maintained in part and Lapointe was not  
1823  
allowed to opine on the Castor Bankruptcy and its causes.  
•
Objection sous réserve # 85 was maintained in part the contested extract  
of the written report not being in evidence for the purpose of establishing a  
comparison between Castor’s situation and what other institutions did in  
1
992.1  
824  
Exp er t Evid en ce  
1
1
1
1
1
1
1
817  
818  
819  
820  
821  
822  
823  
D-1342, pp. 1-2  
D-1342, pp. 2-5  
D-1342, pp. 5-12  
Lapointe, October 13, 2009, pp.50-51  
Transcription October 13, 2009, p.98  
Transcription, October 13, 2009, pp. 100-107  
Trial minutes of December 7, 2009 and transcription of December 7, 2009, pp.12-13; see also trial  
minutes and transcription of October 13, 2009  
Trial minutes of December 7, 2009 and transcription of December 7, 2009, pp. 12-13 ; see also trial  
minutes and transcription of October 13, 2009  
1824  
500-05-001686-946  
PAGE: 342  
[
1723] Lapointe’s knowledge of the actual evidence before this Court and of Castor’s  
1825  
business and affairs during the relevant years (1988, 1989 and 1990) is very limited.  
[
1724] Lapointe testified that Canada had gone through an exceptional period of growth  
that lasted seven years (1983-1989) after the recession of 1981-1982 and before the  
1
826  
During that seven year period, investments in real estate  
recession of 1990-1991.  
were stimulated by an exceptional increase in a demand for space and high  
expectations with respect to inflation and appreciation of property values.  
[
1725] Lapointe opined that most of the analysts and economists did not anticipate the  
990-1991 recession. At most, said Lapointe, they foresaw a slowdown or slackening of  
1
economic activity which, for many, was to have been of short duration and followed by a  
rapid return to a situation of strong growth.  
[
1726] Lapointe wrote that analysts had not foreseen the seriousness of the real estate  
1827  
The confidence of consumers  
crisis that took place at the beginning of the 90s.  
remained very high until 1988 while the unemployment rate and interest rates were in a  
state of reduction or decrease. Afterwards, the index started to diminish to reach in  
1
990 its lowest level since the 1982 recession. Even though the confidence of  
1828  
consumers diminished, Lapointe said that of the business sector remained high.  
[
1727] Concerning the Canadian economy, Lapointe opined that there was generally an  
underestimate of growth in a period where there was growth of economic activity and an  
1
829  
He based his comments on review and  
overestimate in a period of slowdown.  
combination of the following information:  
•
The December economic forecast for the following year covering a dozen  
Canadian organisms published by the newspaper La Presse.  
•
The January forecast of the Canadian Business Review further to its own  
investigation covering on average some fifteen organisms.  
[
1728] In the October 1990 edition of its publication, the Conference Board recognized  
1830  
that the Canadian economy was in recession.  
[
1729] Lapointe testified that the real estate market is influenced by general economic  
conditions.  
[
1730] Lapointe explained that during the greatest part of the 80s, property values in  
Canada were positively influenced by the flow of capital coming from foreign investors  
1825  
1826  
1827  
1828  
1829  
1830  
Lapointe, October 13, 2009, pp. 51 and following  
Lapointe, October 13, 2009, p. 136  
D-1341, p. 4  
D-1341, pp. 11-12  
D-1341, pp. 13-15  
D-1341, p. 17  
500-05-001686-946  
PAGE: 343  
and institutions such as insurance companies and pension funds. Real estate was  
perceived as a long-term investment which permitted a matching of assets to long-term  
liabilities.1  
831  
[
1731] After a period of growth, the value of properties reduced substantially in all  
categories of real estate but particularly for office space, mixed occupancy and  
hotels.1  
832  
[
1732] Lapointe commented specific real estate markets of Montreal, Toronto, Calgary  
and Vancouver.  
Toronto  
The values of properties constantly progressed and peaked in 1989-1990. Thereafter,  
1
833  
they gradually lowered as of the second quarter of 1990.  
Montreal  
The Montreal market generally followed the pattern of the Toronto market, but the ups  
and downs were less pronounced. There was progressive plus-value gains between  
1
834  
1985 and 1990 but in the second quarter of 1990, the values started to fall.  
Calgary  
The behaviour of the Alberta market differed considerably from that observed in Quebec  
and Ontario. Economic activity, as a whole, was closely tied in to the performance of the  
gas and oil sector where prices fell sharply until 1986. Large companies had to  
restructure themselves which resulted in massive lay-offs with the consequence that  
1
835  
real estate property values decreased until 1991.  
Vancouver  
The value of properties in British Columbia suffered the same fate as that observed in  
Ontario and Quebec but it was less pronounced and with some delay. Values  
progressed until 1990 and the decreases observed subsequently were relatively  
modest.1  
836  
1831  
1832  
1833  
1834  
1835  
1836  
D-1341, p. 24  
D-1341, p. 26  
D-1341, p. 28  
D-1341, p. 31  
D-1341, p. 34  
D-1341, p. 36  
500-05-001686-946  
PAGE: 344  
[
1733] In cross-examination, Lapointe acknowledged that he had not considered the  
quality and other characteristics of the Castor properties and he reiterated that he was  
not opining on their values. 1  
837  
1838  
1734] Lapointe acknowledged that the C&L publication dated February 3, 1988  
[
constituted a warning to all C&L professionals, a certain form of needed  
conservatism.1  
839  
[
1735] Lapointe admitted that C&L were economic observers after being asked to look  
at another C&L publication to all professionals, exhibit PW-1420 (T&T 155) dated July  
3, 1990, where they had written:  
2
"
Realizable values for real estate have dropped sharply in many areas of the  
country over the last several months. In many cases, this represents the reversal  
of a boom market and affect both (inaudible) values and the values for developed  
real estate whether intended for a resale or as a revenue producing properties.  
The real estate market problem affects not only developers and other direct  
investors in real estate, but also those who have made loans secured by real  
estate, those who have made loans to enterprises whose principal assets are  
real estate and those who are holding real estate as a result of default on loans.  
This is a time to be careful and conservative in assessing real estate values. One  
(
1) of the lessons of the mil neuf cent quatrevingt- deux (1982) - mil neuf cent  
quatre-vingt-cinq (1985) (sic) real estate market was that it is difficult for investors  
and creditors to accept not only that values are depressed but that they could go  
even lower.  
[
1736] Lapointe also acknowledged that the tool he had used, the Russell index, was  
essentially composed of first quality properties (“propriétés institutionnelles”) which  
might not be affected in a recession scenario as negatively as other kinds of  
properties.1  
840  
[
1737] Lapointe was shown a third document prepared by C&L for the benefit of all its  
professionals, exhibit PW-1420 (AM-50) dated December 31, 1982 and revised on  
December 12, 1990, and was asked if its content made him change or qualify the views  
he had previously expressed. In said exhibit, C&L had written the following:  
1
. Economic conditions similar to those that arose in 1982 are again having  
significant impact on the real estate industry. (…) In this environment,  
1837  
1838  
1839  
1840  
Lapointe, October 14, 2009, pp.7 and following  
PW-1420-1D  
Lapointe, October 14, 2009, pp. 18 and following  
Lapointe, October 14, 2009, pp. 29-30  
500-05-001686-946  
PAGE: 345  
several areas of accounting and financial statements disclosure should be  
carefully considered in all assignment where real estate investments are  
significant.  
2
. This memorandum discusses the valuation issues associated with real  
estate investment and the generally accepted accounting principles that  
must be now applied to this area.  
[
1738] Lapointe answered that the document had no impact on his expert report or  
comments but he added in the same sentence that at the end of 1990 it was quite clear  
that Canada was in a recession. Lapointe testified in French and his specific words  
were the following:  
Non, ça change pas mon expertise et le sens de mon expertise. On fait référence  
à la situation de quatrevingt-deux ('82). Et comme je vous mentionnais tout à  
l'heure, la récession de quatre-vingt-deux ('82)... quatre-vingt ('80) - quatre-vingt-  
deux ('82) était plus sévère que celle de quatre-vingt-dix ('90) - quatre-vingt-onze  
(
(
'91). Et révisé en décembre... au douze (12) décembre, c'est que déjà le douze  
12) décembre on a une bonne idée... Vous savez que la récession de quatre-  
vingt-dix ('90) - quatre-vingt-onze ('91) a débuté au deuxième trimestre de  
quatre-vingt-dix ('90). Et à la fin de quatre-vingt-dix ('90), on sait... on a une  
bonne idée que le Canada est en récession.  
Alors donc, c'est de règles de prudence vis-à-vis des vérificateurs... qu'on  
distribue aux vérificateurs des compagnies.1  
841  
[
1739] In cross-examination, Lapointe was also shown a memorandum signed by  
Whiting, dated September 11, 1990 concerning the fair market value of the MEC and  
1
842  
:
where Whiting had written to Wersebe the following  
I have no certainty of any buyers interested in the property at any price, let alone  
this value range. The uncertainties in the marketplace, the recession with the  
retail and real estate sectors already hard hit. Interest rates, political stability will  
1843  
have an impact.  
1841  
1842  
1843  
Lapointe, October 14, 2009, pp.35-36  
Lapointe, October 14, 2009, pp.37-39  
PW-1159-6  
500-05-001686-946  
PAGE: 346  
[
1740] Lapointe acknowledged that his report and comments were based on the  
information that had been available to him, namely the Russell index, and that they had  
1
844  
to be looked at and taken for what they were, nothing else.  
[
1741] Lapointe was also shown the following noted comment from Goulakos in C&L’s  
1845  
audit working papers of 1990 (dated February 2, 1991) :  
"
As per S. Goulakos, the increase in rates is due to the deterioration of the  
1846  
economy over the past year and the difficulty faced by the real estate market."  
[
1742] Lapointe agreed that there had been a deterioration of the economy, as  
1847  
Goulakos had said, and a recession in Canada since the second quarter of 1990.  
Lapointe acknowledged that the situation of the properties that were part of the Russell  
1
848  
index could be quite different from the situation of the Castor properties.  
[
1743] In cross-examination, Lapointe was shown various articles and publications of  
1849  
990 and he admitted that analysts and economists had anticipated the recession.  
1
[
1744] Finally, Lapointe said he had not looked at the specific market of hotel properties  
where he could however attest that there had been a serious crisis from 1988  
onwards.1  
850  
Lay witness evidence  
[
1745] Prychidny testified namely of the following in relation to the actual economic  
situation surrounding the hotel properties financed by Castor:  
•
Asked to describe the general state of affairs of the Skyline hotels (Toronto,  
Calgary and Ottawa) and of the MLV complex in the fall of 1990, Prychidny said :  
Topven Holdings or the Skyline Airport was incurring  
significant operating loses to the tune of ten (10) million dollars or  
more during that period of time. Again, with respect to... they're  
still having problem meeting certain obligations and payments that  
are summarized in this memorandum as well. So there's cash  
flow reporting to Castor Holdings at that particular time indicating  
1844  
1845  
1846  
1847  
1848  
1849  
1850  
Lapointe, October 14, 2009, pp.39-40, pp. 43 and following  
Lapointe, October 14, 2009, p. 40  
PW-1053-13, sequential page 222  
Lapointe, October 14, 2009, p.41  
Lapointe, october 14, 2009, pp. 41 and following  
PW-3073, PW-3074, PW-3075, PW-3076  
Lapointe, October 14, 2009, p.74  
500-05-001686-946  
PAGE: 347  
that Topven Holdings and Skyline Airport still needed cash to  
survive.  
The Skyline Calgary, at that time, again the market was turning  
to even, you know, worst than nineteen eighty-nine (1989).  
So, again, it's experiencing larger amounting losses during the  
year nineteen eighty-nine (1989) and nineteen ninety (1990). And  
it still required the financial support with respect to paying ongoing  
expenses as well as paying the interest coverage that existed on  
that entity.  
The Skyline Ottawa I guess it's the same story, it's just a  
continuing spiral in losses in this case as well. The lease was  
still outstanding. And actually, at that point in time, the  
consideration was to purchase the interest from Campeau  
Holdings and that was being conducted by George Dragonas on  
behalf of Mr. Stolzenberg during this period of time. As we  
referred to earlier, the lease as it existed in its current state was  
uneconomical, it produced annual operating losses. So the plan  
would be to have Castor related entity or Stolzenberg related  
entity approach Campeau with a view of acquiring the real estate  
associated with that property.  
Maple Leave Village we continued our attempts to try to sell the  
hotel at that particular time. But again, at this point in time, there  
is monthly... Castor had control of the bank situations, signing  
cheques and there was, again, constant call for cash with  
respect to property tax arrears and ongoing operating  
expenses. 1 (our emphasis)  
851  
•
Asked to describe the economic environment of 1990, Prychidny made the  
following comments:  
The reality in nineteen ninety (1990) is the market was in fact  
1852  
turning  
In June of nineteen ninety (1990), the barn... the horse had left  
the barn. We were in a downturn at that particular time, so there  
was no positive feedback that I was able to receive to present  
actual... an offer to Stolzenberg for that particular... during that  
June of nineteen ninety (1990) to September ninety-one ('91).  
(
…)There was more interest in the eighty-eight ('88) years, as  
1853  
opposed to the later years.  
1
1
1
851  
Prychidny, October 14, 2008, pp.238-239  
Prychidny, October 15, 2008, p.22  
852  
853  
Prychidny, November 3, 2008, pp.270-271  
500-05-001686-946  
PAGE: 348  
the context of this one arrived in June of nineteen eighty-five  
1985), it was obvious that the hotels were over leverage, that we  
(
went through eighty-five ('85), eighty-six ('86), eighty-seven ('87),  
was the last year that you'll see any audit done in our groups... ...  
so it was obviously if the owners of York-Hannover cannot  
support it, the only strategy would be potentially to sell the hotels,  
since they weren't being supported and renovated by the current  
owners and/or lenders.  
Nineteen eighty-eight (1988) was the best year, we've talked  
about that in the market, so I was... I was pushing to actually sell  
the hotels during nineteen eighty-eight (1988) in some form or  
fashion because it was going, the hotels were already losing thirty  
(
30) to forty (40) million dollars a year in aggregate. So to  
continue on didn't make sense, so we have to look at the exit  
strategies to sell, and that form is a genesis of these discussions.  
Well, the approach, the critical approach that you'll see in going  
through here nineteen eighty-eight (1988) was Von Wersebe's  
sale and leaseback, he was adamant on the leaseback proposal  
which, in my opinion, didn't make sense, one because of the  
terms he wanted and he wanted the Skyline brand, he didn't want  
the York-Hannover Hotels to manage.  
These are a series of properties, if you look back, have  
underperformed because of York-Hannover, because of that  
minding, because of so many things. So going forward is obvious  
that Von Wersebe wasn't really a player with the team to say, yes,  
let's set the hotel and put it in new hands of a new (inaudible)  
position.  
That, and he also had his minimax concept, as we discussed  
earlier in our testimony as well, which is a Von Wersebe operating  
strategy, which encompassed taking the fruit... just concentrating  
York-Hannover just do the rooms, and actually sever the food and  
beverage operations and give that to a third-party operator.  
We tried it, it didn't work. To this day that concept doesn't exist  
with any hotel, service hotel, company, it didn't make sense, it  
was impractical. So our efforts in sale were hampered by one, his  
adamancy on the leaseback scenario, his adamancy on  
maintaining the Skyline brand and pushing this minimax concept  
that try and get for six (6) months, it didn't work and it never did  
work, I thought we should get out of that and on to something  
different. (…)  
500-05-001686-946  
PAGE: 349  
So that hampered the strategy going forward.1854  
Not appreciably largely related to the timing, we're now at the end  
of nineteen eighty-nine (1989), we missed the market going into  
ninety ('90), it got worse, so I'd have to say timing is one or time  
frame is one category, how it categorizes to get your high value;  
another one is market conditions, the peak is gone (…).1  
855  
[
1746] Regarding the actual economic situation of 1990 surrounding some of the  
properties financed by Castor, Ron Smith testified as follows:  
•
The economy in California and the DT Smith projects:  
I was aware of the market conditions as a result of visiting the  
projects, as a result of various information provided by various  
publications in Southern California which were sent to our offices  
and with meetings that we held with the D.T. Smith  
representatives and others in Southern California. (…)  
The R word was the short name for "recession" and that was  
starting... they hadn't hit by then but by August of nineteen ninety  
(
1990), the economy in California was starting to go sideways and  
there was talk that they were heading towards a recessionary  
1856  
period.  
the prices were starting to increase dramatically, but particularly  
from nineteen eighty-five (1985) onwards, and prices... we noted  
that prices peaked in late eighty-nine ('89) for the projects that we  
were working on and started to go... softened in early nineteen  
ninety (1990) and as well construction activity was slowing down  
at that point in time as well. So it is an accurate statement that we  
noted in our projects as well.1  
857  
that was happening in all of the D.T. Smith projects through to  
early nineteen ninety (1990) and it actually led to the point where  
we had to entertain voluntary auctions in all of the construction  
1854  
1855  
1856  
1857  
Prychidny, November 4, 2008, pp.75-77  
Prychidny, November 4, 2008, pp.244-245  
Ron Smith, June 10, 2008, pp. 46-47; see also exhibit PW-1113F  
Ron Smith, June 10, 2008, p. 48  
500-05-001686-946  
PAGE: 350  
loan projects in the fall of nineteen ninety (1990) in order to  
stimulate the sales of the properties.1  
858  
we'd had a very strong price rise all the way through the nineteen  
eighty-nine (1989), by the third quarter, all of a sudden we noticed  
that it just had peaked and in nineteen ninety (1990), it was going  
sideways, and then in the late nineteen ninety (1990), it started to  
actually slide downwards.1  
859  
By nineteen ninety (1990), really, the market had shifted on us.1860  
•
the MEC project and its opening in November 1990:  
The tragedy of it all is that the market was changing on us in  
nineteen ninety (1990) and the project finally opened up in a very  
difficult retail market, such that not only did we miss the fall and a  
good part of the Christmas market for nineteen ninety (1990), we  
also opened up in a period where the retail market was crumbling  
on us, and instead of opening up with about eighty percent (80%)  
occupancy, we ended up opening only with about a sixty-seven  
percent (67%) occupancy and a lot of turmoil with the various  
tenants that were supposed to occupy the project. So, the delays  
not only cost more for the project in cost overruns, it ate up all of  
the forty-two (42) million dollars bonus that we thought we were  
going to get from the pad, and it delayed the opening of the  
project such that the project opened up in probably the most  
disadvantaged time that it could open up, and unfortunately, it  
never recovered from that while I was employed with Castor.1861  
•
the TWTC project and its condominium portion:  
But in nineteen ninety (1990), the market turned a bit and some  
of the condo purchasers started to renegotiate their positions. And  
that's when the market started to turn a bit on the condos.  
1
1
1
1
858  
Ron Smith, June 10, 2008, p. 49  
Ron Smith, June 10, 2008, p.62  
859  
860  
861  
Ron Smith, June 11, 2008, p.10  
Ron Smith, September 15, 2008, pp.122-123  
500-05-001686-946  
PAGE: 351  
[
1747] Simon said:  
Well, nineteen ninety (1990), there was, you know, some  
developments in the Canadian economy, real estate, markets,  
both in some areas of Canada and some areas of the United  
States were experiencing some setbacks,1  
862  
[
1748] Numerous publications were expressing concerns about a slowdown or a  
1863  
recession, either in Canada or in the State of California.  
C&L minimal knowledge as of December 31, 1990  
[
1749] In relation to the actual economic situation of 1990 and to their work as auditors  
for 1990, and as it appears from C&L’s own professional material, from their audit  
working papers of 1990 or from the valuation letters they issued, C&L knew that :  
•
Realizable values for real estate had dropped sharply in many areas of the  
1864  
country over the months preceding July 23, 1990.  
•
This real estate market problem affected not only developers and other direct  
investors in real estate, but also those who had made loans secured by real  
estate, those who had made loans to enterprises whose principal assets were  
real estate and those who were holding real estate as a result of default on  
loans.1  
865  
•
•
There had been a slowdown in the real estate market of North America.1866  
Economic conditions similar to those that had arisen in 1982 were again having  
1
867  
significant impact on the real estate industry.  
1
862  
863  
Simon, April, 27, 2009, p.130  
See the Wells Fargo Economic Monitor (August 7, 1990 - PW-1113F; November 14, 1990 – PW-  
1
1
113H; February 14, 1991 – PW-1113I); PW-2908, volume 2, p. H-57; Lapointe, D-1341  
1864  
1865  
1866  
1867  
PW-1420 (T&T 155) dated July 23, 1990  
PW-1420 (T&T 155) dated July 23, 1990  
PW-6-1 (C&L valuation letter dated September 28, 1990)  
PW-1420 (AM-50) dated December 31, 1982 and revised on December 12, 1990; see also PW-1053-  
1
3, sequential page 222  
500-05-001686-946  
PAGE: 352  
•
It was difficult for investors and creditors to accept not only that values were  
1
868  
depressed but that they could go even lower.  
•
They should not underestimate the pressures on companies to stretch earnings  
or report a favourable financial condition particularly in light of the current credit  
crunch.1  
869  
•
•
It was of first importance to obtain sufficient appropriate audit evidence, not to  
“
audit by conversation” and to exercise sufficient professional skepticism. They  
1870  
had to step back and ask themselves “Does it make sense?  
They were alerted to pitfalls:  
o They were asked to make sure receivables that were supported by real  
estate as collateral reflected the softening of the market. 1871  
o They were told that increases in the allowance for non-collectibles may be  
needed. 1  
872  
o They were asked to maintain an attitude of objectivity and professional  
skepticism and not to assume that the accounts or the client explanations  
were right.1  
873  
o They were told to question, to challenge and to compare new information  
with what was already known about the client and its business in  
general.1  
874  
•
•
Several areas of accounting and financial statements disclosure had to be  
carefully considered in all assignments where real estate investments were  
significant.1  
875  
It was time to be careful and conservative in assessing real estate values.1876  
Road map  
1868  
1869  
1870  
1871  
1872  
1873  
1874  
1875  
1876  
PW-1420 (T&T 155) dated July 23, 1990  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (T&T 163) dated January 30, 1991  
PW-1420 (AM-50) dated December 31, 1982 and revised on December 12, 1990  
PW-1420 (T&T 155) dated July 23, 1990  
500-05-001686-946  
PAGE: 353  
[
1750] The loans looked at by experts are largely the same but Plaintiff’s experts and  
Goodman used different groupings depending on the conclusions they reached as to  
the ownership of some properties or entities.  
[
1751] The discussion of the LLP issue is done, in light of the burden of proof that rests  
on Plaintiff, by using Plaintiff experts’ groupings and the following sub-headings: MLV,  
YH Corporate loans, MEC, TSH, CSH, OSH, TWTC, Meadowlark and DT Smith.  
MLV  
Experts’ positions  
[
1752] Plaintiff’s experts opined that a LLP was required for MLV in 1990 and they  
proposed the following minimum LLP:  
•
•
•
Vance : $73 million1877  
Froese : $62.1 million1878  
Rosen: a range of $75.7 million to $115 million1879  
[
1753] Vance opined that the total value used to assess the MLV project should not  
have been more than $93.7 million including the hotels value figure of $ 67.7 million and  
1
880  
the mall and amusement park figure of $26 million.  
1754] For his LLP, Vance used that figure of $93.7 million. However, he mentioned that  
[
an appraisal dated January 14, 1991 by Lincoln North & Company Limited  
1
881  
(
“Lincoln”)  
had established the mall and amusement park value between $2.4 and  
$
4 million only. Therefore, using the Lincoln appraisal would have brought down the  
total value of the entire project at $70 million.  
[
1755] Froese used the total value figure of $101.6 million: $67.7 million for the hotels, $  
2
6 million for the mall and amusement park, $1.476 million for current assets and $6.46  
1882  
million for the amusement park rides.  
[
1756] Rosen took into account the information hereinabove mentioned and discussed  
1883  
by Vance.  
1877  
1878  
1879  
1880  
1881  
1882  
1883  
PW-2908  
PW-2941-4  
PW-3033, vol.2  
PW-2908, vol. II, p. A-35  
PW-1129  
PW-2941-4  
PW-3033, vol. 2, Appendix D  
500-05-001686-946  
PAGE: 354  
[
1757] Goodman used a total value of $141.7 million, which included a value of $40  
million for the mall and the amusement park land, a value of $104 million for the hotels  
1
884  
and the wax museum and a value of $6.5 million for the amusement park rides.  
[
1758] Goodman assessed the prior ranking creditors Great-West Life and National  
1885  
Bank at $24.9 million and Castor’s exposure at $134 million.  
1
886  
[
1759] Goodman calculated a deficiency of $26 million,  
but he opined that no LLP  
was needed for MLV. He even said that neither Castor nor C&L should have recognized  
1
887  
a $5 million LLP on MLV as they did.  
Additional evidence specific to MLV  
[
1760] Late in 1989, FICAN had commenced judicial proceedings before the Superior  
1888  
FICAN had asked C&L  
court of Ontario to appoint a receiver to the MLV project.  
1
889  
Toronto to act as the receiver for the project.  
1
890  
Castor’ exposure to  
[
1761] Castor intervened and settled the situation with FICAN.  
MLV increased. Castor even paid the account sent by C&L to FICAN for services  
rendered in connection with “professional services rendered with respect to the Bank's  
1
891  
position with regard to Maple Leaf in the amount of $2,855”.  
[
1762] The operations of MLV continued to encounter serious financial difficulties and  
the survival of the MLV project was wholly dependent on Castor’s ongoing financial  
support.1  
892  
[
1763] Again, the terms and conditions of the commitment letters and extension letters  
as well as the loan documentation in connection therewith called for the payment of  
monthly interest, annual fees and the supply of financial information. The borrowers  
were in chronic breach of all of such covenants.  
[
1764] Castor consulted its lawyers for information on the process it would have to  
follow should it wish to appoint a receiver and manager to the assets and undertakings  
of MLVII.1  
893  
1884  
1885  
1886  
1887  
1888  
1889  
1890  
1891  
1892  
1893  
D-1312, p. 351  
D-132, p. 351  
D-1312, p. 351  
Goodman, October 9, 2009, pp.14, 205-210  
PW-1070F-18A; PW-2845  
Ron. Smith, May 15, 2008, p. 245; May 16, 2008, pp. 36 and following; PW-1070F-18A  
PW-1077-A  
Ron Smith, May 16, 2008, p.45  
See PW-1070F and PW-1070G  
PW-490  
500-05-001686-946  
PAGE: 355  
[
1765] By the end of 1990, the connection that was one of the main assumptions of the  
1
989 Jones McKittrick appraisal relating to the Mall had not yet been constructed.  
[
1766] As at December 31, 1990, MLVII’s 1990 financial statements disclosed accounts  
payable of $ 3.9 million and bank indebtedness of $ 5.8 million. Note 3 to the financial  
statements provided the following details of mortgages and loans payable provided by  
third parties and of a receivable from and a payable to YHDL:  
Loans payable provided by third parties:  
st  
•
•
•
•
National Bank (1 mortgage) : $15.74 million  
Fican : $2.73 million  
st  
Great-West Life (1 mortgage) : $ 9.45 million  
Capital leases: $ 1.85 million.1894  
Receivable from and payable to YHDL:  
•
A receivable from shareholder of $33.473 million, offset by a payable to YHLP of  
1
895  
$
38.603 million (a net payable of $ 5.2 million).  
[
1767] Castor recorded a $5 million allowance for loan losses in relation to its exposure  
to MLV. In their audit working papers, C&L wrote “C&L considers that an additional  
1
896  
reserve could be in order for that project”.  
[
1768] In its Montreal audit planning memo for the 1990 audit, C&L identified MLV as an  
1897  
audit concern.  
[
1769] The completed questionnaires indicated that interest and repayment terms were  
being met even though the loan covenants called for payment of interest and interest  
was capitalized.1  
898  
[
1770] The staff member who did the investment section of CHL wrote in his MLV loan  
1899  
He,  
notes “client did not allow C&L to photocopy MLV inc. F/S as at Dec 31/12/90.  
however, traced to the client’s copy and reproduced some numbers of those financial  
statements, namely:  
o The MTG and loans for 1990 of $36.3 million  
1894  
1895  
1896  
1897  
1898  
1899  
PW-478I  
PW-478I  
PW-1053-15-10, sequential page  
PW-1053-16, sequential pages 260 and 267  
PW-1053-15-2, PW-1053-15-12  
PW-1053-15, sequential page 161  
500-05-001686-946  
PAGE: 356  
o The bank indebtedness for 1990 of $5.8 million  
o The account payable and accrued liabilities for 1990 at $3.9 million  
o The 1988 accumulated deficit of $3.3 million and the net loss for 1988 of  
$4.27 million  
o The 1989 accumulated deficit of 6.9 million and the net loss for 1989 of  
3.34 million  
$
o The 1990 accumulated deficit of $11.5 million and the net loss for 1990 of  
$
4.78 million1  
900  
[
1771] The loan information questionnaires (“LIQ”) in C&L’s working papers (relating to  
CHL) showed Castor’s evaluation of a number of MLV loans as being “high risk  
nature”.1  
901  
[
1772] Under the subheading “auditor’s additional comments”, on one of the Loan  
Evaluation Questionnaires (“LEQ”) relating to MLV, C&L wrote:  
Conclusion  
Client view this loan as a high risk nature but took a reserve a 5M$. C&L  
considers this loan to be still risky after recording the reserve (…)1902  
[
1773] Quesnel, the senior auditor responsible for the investment section in the 1990  
CHL audit, namely wrote the following in his AWPs, on page E-65b:  
MLVII (Maple Leaf Village)  
As per E 90 last appraisal done in 89 was below Total loan value by ~2 400 000$  
C&L considers that an additional reserve could be in order for that project. 1903  
[
1774] To say the least, the overseas working papers relating to MLV are  
1904  
The following annotations are written relating to loans and to increase in  
incomplete.  
loans:  
1900  
1901  
1902  
1903  
1904  
PW-1053-15, sequential pages 161-162  
PW-1053-15, sequential pages 138, 140, 142, 144, 146, 148, 150, 152,154, 156, 158, 160  
PW-1053-15, sequential page 160  
PW-1053-15, sequential page 128  
PW-2908, vol. 2, pp. A-31 and A-32  
500-05-001686-946  
PAGE: 357  
Dr. Marco Gambazzi sign all documents in trust for: Runaldi, Trade Retriever,  
1905  
Charbocean  
Castor Mtl interest, NV Interest and Commission  
1906  
[
1775] At the year-end meeting with Wightman, Stolzenberg agreed to place loans to  
borrowers connected to the MLV project on a non-accrual basis effective January 1,  
1
907  
1
991.  
[
1776] In his handwritten notes from his year-end meeting with Stolzenberg, Wightman  
inscribed the following:  
The margin on this loan is very thin and W.O.S. has undertaken to do the  
following ion 1991:  
1
2
. Capitalize no more interest or fully reserve  
. Create additional reserves of no less than 1% above this year and above  
capitalized interest.  
3
. Aggressively pursue the sale of part or all of position”1908  
Loans as of December 31, 1990  
[
1777] At the end of 1990, Castor’s total exposure was in excess of $ 130 million.1909  
Owed to CHL  
•
•
•
•
•
Loan 1105 to MLVII: $6.4 million1910  
Loan 1126 to MVII : $4.8 million1911  
Loan 1136 (re Fican) : $6 million1912  
Loan 1048 to YHLP : $14 million1913  
Loan 1125 to KVWI: $7.2 million1914  
1905  
1906  
1907  
1908  
1909  
1910  
1911  
1912  
1913  
1914  
P-1053-87-2 (B39)  
PW-1053-87-2 (B40)  
PW-1053-12, sequential page 76  
PW-1053-12, sequential page 76  
Ron Smith, May 15, 2008, p. 204  
PW-1053-15, sequential pages 155-156  
PW-1053-15, sequential pages 157-158  
PW-1053-15, sequential page 134  
PW-1053-15, sequential pages 163-164  
PW-1053-15, sequential pages 258-259  
500-05-001686-946  
PAGE: 358  
•
•
•
•
•
•
•
•
•
Loan 1011: $3 million1915  
Loan 1012: $2 million1916  
Loan 1013: $4 million1917  
Loan 1014: $7.5 million1918  
Loan 1015: $5 million1919  
Loan 1016: $2.4 million1920  
Loan 1017: $3 million1921  
Loan 1018: $2.3 million1922  
Loan 1019: $ 2.2 million1923  
Owed to CHIF  
•
•
•
•
•
•
Loan 770001/0009 to Runaldri – 5.4 million 1924  
Loan 26100/0004 to Charbocean Trading – 10.8 million 1925  
Loan 385005/3010 to Gebau Overseas - 11.9 million1926  
Loan 385009/3005 to Gebau Overseas –3.3 million1927  
Loan 385009/0003 to Gebau Overseas – 6.1 million1928  
Loan 38500/0008 to Gebau Overseas – 0.9 million1929  
1915  
1916  
1917  
1918  
1919  
1920  
1921  
1922  
1923  
1924  
1925  
1926  
1927  
1928  
1929  
PW-1053-15, sequential pages 137-138  
PW-1053-15, sequential pages 139-140  
PW-1053-15, sequential pages 141-142  
PW-1053-15, sequential pages 143-144  
PW-1053-15, sequential pages 145-146  
PW-1053-15, sequential pages 147-148  
PW-1053-15, sequential pages 149-150  
PW-1053-15, sequential pages 151-152  
PW-1053-15, sequential pages 153-154  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
500-05-001686-946  
PAGE: 359  
•
•
•
•
•
Loan 38500/0004 to Gebau Overseas – 4.7 million1930  
Loan 441004/3010 to Harling International – 5 million1931  
Loan 441004/0008 to Harling International – 12.1million1932  
Loan 890000/0010 to Trade Retriever – 7.5 million1933  
Loan MLV Treasury – (6 million)1934  
Revenue recognition – capitalized interest  
[
1778] Castor recognized $10,550,803.20 of capitalized interest as revenue.1935  
Conclusions  
[
1779] Taking into account the state of the Canadian economy at the end of 1990, the  
history of the MLV project and the additional facts of 1990, it is obvious that the value  
figures mentioned by Plaintiff’s experts were the value that C&L had to use to comply  
with GAAP.  
[
1780] Had Goodman used those values instead of the ones he took into account, he  
1936  
very comparable to the ones  
would have come to a deficiency of at least $66 million,  
calculated by Plaintiff’s experts.  
[
1781] Conclusions reached under the subheadings MLV of the 1988 and the 1989  
financial statements sections of this judgment apply mutatis mutandis.  
YH Corporate loans (excluding the “Nasty nine loans”)  
[
1782] The loans which are part of the YH Corporate loans for 1990, which are looked at  
by Plaintiff’s experts, are those described under the subheading “YH Corporate loans”  
of the 1988 and 1989 financial statements sections of this judgment.  
1
937  
[
1783] As it appears from his report, Rosen looked at loans  
that neither Vance nor  
Froese looked at, which fact explains the difference between their respective suggested  
minimum LLPs.  
1930  
1931  
1932  
1933  
1934  
1935  
1936  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1053-87, sequential pages 32, 126, 135-136, 143-147  
PW-1075A  
his deficiency of $26 million plus the difference between his total value ($141 million) and Froese’s  
total value ($101 million)  
500-05-001686-946  
PAGE: 360  
Experts ‘positions  
[1784] All Plaintiff experts opined that huge LLPs were required for 1990.  
•
•
•
Vance: $125.8 million1938  
Froese : $90 to $96.1 million1939  
Rosen: $131 to $170 million1940  
[
1785] Goodman opined that no LLPs were required.  
Events of 1990  
[
1786] In a letter dated January 25, 1990, from Wersebe to Ron Smith, Wersebe set out  
his guarantees included in commitment letters to Castor as follows:  
•
•
•
$10 million in connection with an increase of a loan elated to MEC;  
$10 million in connection with an increase in the KVWI loan facility;  
$6.125 million in relation to a loan facility to YHDL.1941  
[
1787] In the same letter, Wersebe requested that Castor confirm that :  
•
•
•
The personal guarantees would be released on or before April 30,1990.  
They would not be enforced before April 30.  
They would be executed by him only after review by legal counsel and  
receipt of his opinion that the limitations and release provisions noted  
1
942  
were satisfactory in form and substance.  
[
1788] A commitment letter dated March 16, 1990, related to Castor loan 1137 to  
YHHHL included a personal guarantee of Wersebe “limited to his interest in the shares  
owned of the Borrower”.1  
943  
[
1789] YHDL prepared a “pro forma Balance sheet”, as of September 30, 1990 and  
1944  
In said pro forma Balance sheet:  
dated January 25, 1991.  
1937  
1938  
1939  
1940  
1941  
1942  
1943  
Namely In 1990 : $24.3 million of loans to Harling made by CHIF  
PW-2908, vol. III, section 2, page 7  
PW-2941-4  
PW-3033, vol.2, section C, pages 3 and 4  
D-215-2-A  
D-215-2-A  
PW-1062-3  
500-05-001686-946  
PAGE: 361  
•
•
YHDL assumed the sale of MEC for an amount equal to its debts.  
The receivables from parent/affiliates that had grown to $196,557,000 were  
eliminated, namely through write-offs of $80.7 million.  
[
1790] YHDL issued unaudited consolidated financial statements as at September 30,  
1945  
990.  
1
[
1791] A commitment letter dated October 22, 1990, related to Castor’s loan 1081 to  
YHDHL included, under the security subheading, “personal guarantee of Karsten von  
1
946  
Wersebe to remain at $15 million.”  
[
1792] A commitment letter dated December 6, 1990 related to Castor’s loan 1123 to  
KVWI described the security as “personal guarantee of Karsten von Wersebe remains  
at $12.5 million”.1  
947  
1948  
1793] KVWI issued unaudited financial statements as of August 31, 1990 , which  
[
showed that its deficit had increased to $70.5 million from a deficit of $ 41.1 million as at  
August 31, 1989. In note 5 of these financial statements, KVWI explained as follows  
why it had included advances from subsidiaries in equity rather than as liabilities:  
Advances from subsidiary companies are unsecured, bear interest at rates  
depending on prime and are without specific terms of repayment. In the absence  
of the ability to repay or refinance these advances, they have been characterized  
as a component of capital although no formal plan exits to implement reciprocal  
1949  
shareholdings.  
[1794] During 1990, KVWI assumed the YH $20 million loans to CFAG.  
[
1795] There were only three loans receivable recorded in the financial statements of  
CFAG at December 31, 1990 amounting to an aggregate of $20,910,000. Confirmation  
requests were sent out and received by C&L for the two loans totalling $910,000. In  
C&L’s overseas AWPs, there is the following notation under CFAG “KVWI- no  
confirmation sent”.1  
950  
[
1796] No financial statements were available for YHLP for the year ended December  
3
1, 1990.  
1
1
1
1
1
1
1
944  
PW-1171-1  
945  
PW-1137-5  
946  
947  
948  
949  
950  
PW-1054-15  
PW-1058-7  
PW-1136-5A  
PW-1136-5A  
PW-1053-71-6, sequential page 165  
500-05-001686-946  
PAGE: 362  
[
1797] Froese evaluated the combined deficit of KVWI, YHDHL and YHLP at  
1951  
approximately $185.5 million as of December 31, 1990.  
Loans as of December 31, 1990  
[
1798] As of December 31, 1990, Castor’s exposure to YH Corporate loans amounted  
to at least $ 109.6 million (in relation to the following loans):  
•
•
•
•
•
•
•
Loan 1081 to YHDHL : $35 million1952  
Loan 1137 to YHHHL : $10 million1953  
Loan 1123 to KVWI : $27 million1954  
Loan 1092: $10.1 million1955  
Loan 1090: $ 7.5 million1956  
Loan 1153: $ 0.466 million1957  
CFAG loan (158504) : $20 million1958  
Conclusions  
[
1799] All the comments made under the subheading “YH Corporate loans” in the 1988  
and 1989 financial statements sections of this judgment apply mutatis mutandis.  
[
1800] As of December 31, 1990, Wersebe’s guarantees were limited to $12.5 million  
for loan 1123, $15 million for loan 1081 and to value of shares for loan 1137. In all  
cases, they were limited to Wersebe’s interests in North America.  
[
1801] The events that took place during 1990 strengthen again, as did the 1989 events,  
the conclusion regarding the personal guarantees granted by Wersebe: they were  
worthless to Castor in that they were limited to Wersebe’s interests in entities, which  
were fully leveraged and insolvent.  
[
1802] Plaintiff experts’ opinions must prevail: a huge LLP in relation to the YH  
Corporate loans was required in 1990.  
1951  
1952  
1953  
1954  
1955  
1956  
1957  
1958  
PW-2941, vol.4, page 47, paragraph 2.129  
PW-1053-15, sequential pages 232-233  
PW-1053-15, sequential pages 296-297  
PW-1053-15, sequential pages 260-261  
PW-1053-15, sequential pages 230-231  
PW-1053-15, sequential pages 228-229  
PW-167 and PW-2941, vol. 4, pp. 31-32, paragraph 2.82  
500-05-001686-946  
PAGE: 363  
The “Nasty nine”  
Events of 1990  
[
1803] Evidently, at the end of 1990, growth in security values in the existing YH  
projects could not support the additional 1990 YH debt.  
[
[
1804] Reallocation to existing projects was unthinkable.  
1805] Annual restructuring negotiations with YH ensued, with Castor attempting to  
secure Wersebe’s guarantee. As of December 31, 1990, those negotiations were  
unsuccessful.  
[
1806] Castor had to deal with $40 million of interest that had accrued on various YHDL  
loans. It reallocated that $40 million into nine new loans to companies that were  
1
959  
incorporated or taken off the shelf at Castor’s request by McLean & Kerr.  
1
960  
[
1807] In late December 1990, Castor disbursed funds to McLean & Kerr  
as follows:  
$
10 million on each of December 18 and 19, $8.2 million on December 27, and $11.8  
million on December 28. These funds were returned to Castor and recorded as  
1
961  
All of these transactions  
payments of interest, fees and principal on various loans.  
were recorded in Castor’s accounting books and records.  
[
1808] The payments to McLean & Kerr and related cash received from McLean & Kerr  
1962  
were recorded by Castor as follows:  
Castor’s disbursements ($40 million)  
1959  
1960  
1961  
1962  
See the testimony of Alksnis  
PW-1056D-1A; PW-1056D-7; PW-1056D-1-T; PW-1056D-1C and PW-1056D-1D.  
PW-1056D  
PW-1056-D  
500-05-001686-946  
PAGE: 364  
Date  
Borrower and loan number  
Loan 1173-Bioworld Holdings  
Loan 1174–Canont Holdings  
Loan 1172–Blacking Holdings  
Loan 1171–Farl Properties  
Loan 1168–Ptero Holdings  
Loan 1167–Pustul Properties  
Loan 1176-Serotine  
Amount  
Dec. 18, 1990  
Dec. 18, 1990  
Dec. 19, 1990  
Dec. 19, 1990  
Dec. 27, 1990  
Dec. 27, 1990  
Dec. 28, 1990  
Dec. 28, 1990  
Dec. 28, 1990  
$5,000,000  
$5,000,000  
$4,800,000  
$5,200,000  
$3,800,000  
$4,400,000  
$4,200,000  
$3,600,000  
$4,000,000  
Loan 1169–Truncal Holdings  
Loan 1175–Tesia Holdings  
Castor Receipts ($40 million)  
Date  
Loan  
Debtor  
Amount  
number  
Dec. 18, 1990  
Dec. 18, 1990  
Dec. 18, 1990  
Dec. 18, 1990  
Dec. 19, 1990  
Dec. 19, 1990  
Loan 1153  
Loan 1081  
Loan 1125  
Loan 1022  
Loan 1153  
Loan 1123  
YHDL  
YHDHL  
KVWI  
$484,450  
$7,719,927  
$1,504,247  
$291,376  
223356  
YHDL  
KVWI  
$7,974,126  
2,025,874  
500-05-001686-946  
PAGE: 365  
Dec. 27, 1990  
Dec. 27, 1990  
Dec. 28, 1990  
Loan 1153  
Loan 1123  
Loan 1153  
YHDL  
KVWI  
YHDL  
4,067,994  
3,682,679  
12,249,327  
[
1809] McLean and Kerr received no communication and no instructions from YHDL,  
1963 1964  
All instructions came from Castor.  
Wersebe or Whiting.  
[
1810] The companies were incorporated and the transactions documented by Castor’s  
lawyers and under exclusive instructions from Castor while negotiations were taking  
place with Wersebe.1  
965  
[
1811] No negotiations took place with YH as to the content of the commitment letters  
amounts, interest rates, etc.).1  
966  
(
[
1812] Castor did not want Whiting to intervene on this situation before an agreement  
had been reached with YH and Wersebe:  
And the reason that Mr. Dragonas wanted that idea was that he was worried  
about Mr. Whiting holding him up at the audit confirmation process, that Mr.  
Whiting would seek extra concessions from Castor Holdings when we went to get  
those audit confirmations signed by Mr. Whiting. And, secondly, that he thought  
that Mr. Whiting would not sign off on those loans and that he would, you know,  
try to negotiate other positions.  
So, Mr. Dragonas decided on the five (5)-million dollar positions. And that's the  
instructions I got was then to book the nine (9) different loans.1  
967  
The reason why they were put with a different ownership was not to go to Mr.  
Whiting, it was to go around Mr. Whiting.1  
968  
[
[
1813] No further money was advanced to the YH group.1969  
1814] Negotiations between Castor and YH were on-going.  
1963  
1964  
1965  
1966  
1967  
1968  
1969  
Alksnis, February, 7, 2006, pp.181-182; Alksnis, February 8, 2006, p.66  
Alksnis, February, 7, 2006, pp.181-182; Alksnis, February 8, 2006, pp.80, 84, 89, 106, 107-109, 165  
Ron Smith, September 17, 2008, pp.8-10, 169-170, 202-  
Ron Smith, September 17, 2008, p. 212  
Ron Smith, September 17, 2008, p. 206  
Ron Smith, September 17, 2008, p. 208  
Alksnis, February 8, 2006, p.86  
500-05-001686-946  
PAGE: 366  
The decision was made to put them outside of it, out of Mr. Whiting's area of  
control and to keep negotiating with Mr. Whiting and Mr. Von Wersebe as to  
where it was going to end up.  
Whether it was going to end up and parked in the York-Hannover empire with  
Raulino Canada or Raulino offshore or with Mr. Von Wersebe or any of his other  
companies or whatever guarantees he was going to get, those negotiations were  
1970  
ongoing.  
[
1815] As of December 31, 1990, nothing had been agreed to between Castor, YH and  
Wersebe. Castor did not have Wersebe’s guarantees for the $40 million.  
Q- And would you also agree that, by the end of nineteen ninety (1990), Mr. Von  
Wersebe was still bucking at providing his personal guarantee for the  
reallocations?  
A- Yes, that was quite evident in the negotiations of the nine companies, Mr.  
Dragonas made it very clear to us that he did not have the guarantee of Mr. Von  
Wersebe at that point in time.1  
971  
Q- So at the year-end, as I understand it, you still did not have Mr. Von  
Wersebe's agreement to provide a guarantee for any of that forty (40) million  
dollars, is that correct?  
A- That's what Mr. Dragonas informed me.1972  
[
1816] Promissory notes and guarantees were prepared by McLean & Kerr sometimes  
1973  
in January 1991, probably close to January 24, 1991.  
[
1817] Promissory notes and commitment letters were signed by three lawyers of the  
1974  
firm of McLean and Kerr: Harold Blake, Christine Renaud and Soo Kim Lee.  
[
1818] On February 11, 1991, Stolzenberg sent to Alksnis, in draft form and for  
1975  
comments, a letter he was planning to send to Wersebe.  
[
1819] On February 12, 1991, Ron Smith met with the audit staff member of C&L, who  
was handling the investment section. At that date, Smith “didn't know where the loans  
1
1
1
1
1
970  
971  
972  
973  
974  
Ron Smith, September 17, 2008, p. 207  
Ron Smith, September 22, 2008, p. 70 (see also p. 93)  
Ron Smith, September 22, 2008, p. 96  
Alksnis, February 8, 2006, p.66, 70, 141-143  
See their testimonies which are in evidence before the Court : Blake,June 18, 2009; Renaud,  
January 26, 2006; Lee, January 25, 2006.  
1975  
Alksnis, February 8, 2006, pp. 143-148;  
500-05-001686-946  
PAGE: 367  
are going to end up, whose guarantees we were going to get and I did not indicate that  
1
976  
they were tied to York- Hannover or Mr. Von Wersebe.”  
[
1820] Before the audit came to an end, Ron Smith was never told that Wersebe would  
have signed guarantees for the $40 million. The first time he heard about the fact that  
some guarantees would have been signed was some time after the audit, from  
Dragonas.  
I was advised sometime after the audit by Mr. Dragonas that the guarantees had  
come in, that Mr. Wightman had been advised that the guarantees had been  
obtained. I never saw the documentation package, actually, until... I'd believe it  
was nineteen ninety-two (1992).1 (our emphasis)  
977  
[
1821] Mackay, who had to deal with the interests to be paid on these nine loans,  
sustained that he was never made aware that YH or Wersebe was responsible.  
So just to summarize, you weren't aware yourself of any evidence that the loans  
were collectible?  
A- That the loans were collectible? At the time, in ninety ('90) and ninety-one  
(
'91), I didn't know what... how the loans would be worked out to the future. I  
mean, I didn't know... Like these were loans made as they were and I know the  
identity of the borrower, okay, obviously, but they were just nine (9) loans picked  
and names picked. And the ultimate collection of those loans, as I understood it,  
would have been a York-Hannover workout later on where they would have  
realized on those loans.  
And, that was it.1978  
[
1822] Before he was shown some documents during his examination in 2006, Alksnis,  
the partner responsible for the Castor files at McLean & Kerr, had never seen personal  
guarantees signed by Wersebe in relation to these nine loans.1979  
[
1823] From the available evidence, and as of February 15, 1991, the Court finds that  
Castor had not obtained Wersebe’s guarantee.  
[
1824] Eventually, Wersebe distanced himself from these loans.1980  
[
1825] None of the Nasty Nine loans were selected by C&L for confirmation. As a matter  
1
981  
of fact, no unsecured loans appear to have been selected for confirmation.  
1976  
1977  
1978  
1979  
1980  
1981  
Ron Smith, September 22, 2008, p. 136  
Ron Smith, September 22, 2008, pp. 124-125  
Mackay, August 26, 2009, pp. 186-187  
Alksnis, February 8, 2006, pp.137-138, 141  
Alksnis, February 8, 2006, pp. 91-92, 96  
PW-1053-15, sequential pages 13 and 134  
500-05-001686-946  
PAGE: 368  
[
1826] C&L were told that these loans represented new business opportunities with  
1982  
people known to Castor. C&L were told that the loans were unsecured.  
[
1827] The loan files for the nine loans disclosed minimal documentation, with no  
1983  
evidence to support the ultimate collectability of the loans.  
[
1828] The loan commitment letters for the nine loans disclosed that:  
•
•
•
the borrowers had some addresses in common;  
three persons signed as borrower representatives for the nine loans;  
some of the borrowers had addresses that were not consistent with the  
1
984  
address of the person signing for the loan.  
[
1829] Letters dated February 7, 1991 were sent by Castor to Harold J. Blake, Christine  
Renaud and Soo Kim Lee requesting them to sign, as authorized signing officers, the  
1
985  
loan commitments and promissory notes.  
[
1830] The loan files disclosed the following borrower addresses and borrower  
signatures:  
Name of borrower  
Borrower’s address  
Borrower’s signature  
Truncal Holdings Ltd.  
Farl Properties Ltd.  
Bioworld Holdings  
McLean & Kerr / Toronto  
McLean & Kerr / Toronto  
Christine Renaud  
Soo Kim Lee  
Gravenor Keenan /  
Montreal  
Harold J. Blake  
1982  
1983  
1984  
1985  
PW-1053-15, sequential pages 130-131 (see also Quesnel’s transcription)  
See the “red files” relating to PW-1064-1 to PW-1064-9  
PW-1064-1 to PW-1064-9;  
PW-1064-1-D-1; PW-1064-2-D-1; PW-1064-3-D-1; PW-1064-4-D-1; PW-1064-5-D-1; PW-1064-6-D-1;  
PW-1064-7-D-1; PW-1064-8-D-1; PW-1064-9-D-1  
5
00-05-001686-946  
PAGE: 369  
Christine Renaud  
Tesia Holdings Ltd.  
Gravenor Keenan /  
Montreal  
Pustul Properties Ltd.  
Gravenor Keenan /  
Montreal  
Soo Kim Lee  
Blacking Holdings Ltd.  
Serotine Developments  
Ptero Holdings Ltd.  
Gary Cooper / Edmonton  
Gary Cooper / Edmonton  
Harold J. Blake  
Christine Renaud  
Soo Kim Lee  
KHB Investments Ltd. /  
Toronto  
Canont Holdings Ltd.  
Wolfgang Kyser / Toronto  
Harold J. Blake  
[
1831] The result was that Castor’s loans were increased on its balance sheet by $40  
million and accrued and unpaid capitalized interest was reduced on the balance sheet  
by $40 million.  
[
1832] The official corporation’s records of the nine entities, produced by Defendants  
and which include various official stamps of reception, namely as of February 21, 1991,  
1
986  
establish that Wersebe’s name was neither mentioned nor publicized.  
[
1833] Quesnel, the senior auditor responsible for the investment section in the 1990  
audit, namely wrote the following in his AWPs:  
•
On page E-65b:1987  
Doubtful accounts (as per C&L)  
For which no reserve was taken in 1990 or reserve was not enough (as per C&L)  
See list (next page) of all the loans only secured by Prom note (no MTG as  
collateral)  
Those loans represent ~ 17.5% (133 m$) of total loans as at Dec 31, 1990  
(
760m$). 40M$ of that amount was lended in the last ~ 20 days of December.  
•
On page E-65c:1988  
1
986  
987  
PW-1064-1-3 (see stamp on page 51); PW-1064-2-3 (see stamp on page 53) ; PW-1064-3-6 (see  
stamp on page 52); PW-1064-4-3 (see stamp on page 52); PW-1064-5-5 (see stamp on page 53);  
PW-1064-6-4 (see stamp on page 53) ; PW-1064-7-3 (see stamp on page 53); PW-1064-8-3 (see  
stamp on page 52) and PW-1064-9-3 (see stamp on page 57)  
1
PW-1053-15, sequential page 128  
5
00-05-001686-946  
o That the total of loan unsecured was of $133 416 051.  
o That the unsecured loans represented 17.5%.  
PAGE: 370  
o That $40 million of unsecured loans, representing 5%, had been issued in  
December 1990.  
•
On pages E-65d and E-65e  
Mr. Smith was asked about all the loans with only a prom Note as collateral: all  
the ones who were issued before december 1990 are operating line of credit  
loans, mostly, with companies who also have other loans secured by MTG with  
CHL. So CHL investment are secured by the fact that client won’t take any  
chances regarding the unsecured loans because of MTG on other loans with  
CHL regarding the same properties.1  
989  
For all the loans secured only by Prom note and issued in December 1990,Mr.  
Smith said that:  
−
loans only given to companies that have already done business with CHL (they  
know those companies very well)  
−
loans will serve as a starting point for a business investment. Those companies  
will eventually need (in the near future) additional loan. CHL will renegotiate the  
agreement and loans should be secured by MTG.”  
•
On page E-134:  
Note: C&L expresses uncertainty over nature of collateral (prom note for the  
1990  
same $ as loan)  
[
1834] Quesnel, who prepared the working papers E-65b and E-65c, described as  
follows the circumstances surrounding those inscriptions:  
Q.-Décembre '90, une flèche. Ce sont les neuf (9) prêts, si je comprends bien,  
qui ont été faits à la fin de l'année 1990, est-ce que c'est exact?  
R La colonne, le petit signe comptable indique que ces prêts-là ont été émis en  
décembre '90.  
Et pourquoi avez-vous noté Ie fait que neuf (9) prêts ont été émis à Ia fin de  
l'année? Quel était le but de cette indication? /  
1988  
1989  
1990  
PW-1053-15, sequential page 129  
PW-1053-15, sequential page 130  
PW-1053-15, sequential page 207 (see also sequential pages 208 to 215 since the note appearing on  
page 207 also applies to loans discussed on pages 208 to 215)  
500-05-001686-946  
PAGE: 371  
Le but, en tant que tel, c'est simplement que ces prêts-Ià ont été émis vers la fin  
de l'année '90, et j'avais noté, à l'époque, ces prêts-Ià, initialement, comme vous  
constatez, c'est tous des prêts dont l'ordre de grandeur est moindre que certains  
qu'on a regardés depuis Ie tout début, il y en a certains de quarante millions  
(
$40,000,000), cinquante millions ($50,000,000) un peu arrondis, là. Ces prêts  
l'ordre était d'un ordre de grandeur moindre, mais j'avais constaté, à I' époque, il  
y a presque cinq (5) ans, que tous ces prêts-là avaient été émis sur une période  
de temps, bon, peut-être deux (2) semaines, si on peut – pour parler d'une façon  
comme ça , à la fin de l'exercice '90:  
J'avais tout simplement rempli certaines - fait un certain travail, rempli certaines  
feuilles dans Ie dossier parce que je constatais que c'était une situation qui était  
.
un petit peu, peut-être pas bizarre, mais un peu – qui valait la peine un peu  
1991  
d’être regardée.  
[
1835] Quesnel had no recollection of reviewing financial statements for the nine  
borrowers, and he could not remember why he had not completed the second page of  
1
992  
the Loan Information Questionnaires for these nine loans.  
[
1836] Ron Smith’s explanations noted on page E-65e of the AWPs were accepted at  
face value with no audit procedures documented in the audit working papers.  
1
993  
[
1837] The nine companies were incorporated in December 1990.  
Therefore, Castor  
had never done business with any of them earlier.  
[
1838] Hunt, the audit supervisor responsible for audit work related to the allowance for  
the doubtful accounts and loan loss provisions in the 1990 audit, was not aware that  
Quesnel had identified doubtful accounts:  
“
Q. I would refer you now to page E65B of the audit working papers, which is a  
page prepared by Mr. Quesnel dealing with doubtful accounts. Were you aware  
of the fact that Mr. Quesnel had prepared this page?  
A. No.  
Q. Were you aware of the fact that Mr. Quesnel had identified doubtful accounts?  
A. No.  
Q. Were you aware of the fact that he had identified doubtful accounts which  
were not on the list of provisions that you had analyzed at page E300 and  
following?  
A. No.  
1991  
1992  
1993  
Quesnel, November 24, 1995, pp. 7-8  
Quesnel, November 24, 1995, pp. 172-179  
Alksnis, February 7, 2006, pp.184 and following; Alksnis, February 8, 2006, pp. 18 and following  
500-05-001686-946  
PAGE: 372  
Q. What was your understanding when you were working on the section dealing  
with provisions as to what a doubtful account was?  
A. I don’t recall my specific thought process about what a doubtful account was.  
Q. But at the time did you understand, as an auditor, what a doubtful account  
was?  
A. I believe so, yes.  
Q. And what was your understanding at the time?  
A. An account on which the collectability of that account, or the realization of that  
account would be doubtful.  
Q. And how would that doubtful account be reflected in a financial statement?  
A. If it was considered necessary provision would be made against that account.  
Q. Under the heading “Doubtful Accounts” Mr. Quesnel wrote:  
“
Accounts for which no reserve was taken in 1990 or reserve was not  
enough as per C&L”.  
How were you able to prepare your section on investment provisions without  
being aware of Mr. Quesnel’s conclusions on doubtful accounts?  
A. I don’t know how I was able to make my conclusion without that. That would  
be pulled together – as I had no knowledge of this that would be pulled together  
by the manager.  
Q. You assumed that it would be pulled together?  
A. It was not – yes.  
Q. But you had no personal knowledge as to whether it was pulled together or  
not?  
A. No.  
Q. Now, on that page reference is made to nine loans made at year end 1990 in  
the aggregate amount of forty million dollars ($40,000,000). Were you aware of  
the existence of those nine loans?  
A. Not that I recall, no.  
Q. And you did not consider those nine year end loans in your assessment of the  
reasonability of loan loss provisions taken by management?  
A. I don’t recall any knowledge of those loans, so no.  
500-05-001686-946  
PAGE: 373  
Q. In doing your work on provisions did you consider any loans that were  
unsecured?  
A. I don’t recall considering any.  
Q. For purposes of loan loss provisions did you consider that the capacity of a  
borrower to pay the loan was relevant?  
A. I don’t recall specifically considering that.1994  
[
1839] Quintal, the audit manager, acknowledged that the only audit work performed by  
C&L, in addition to Quesnel’s discussions with Ron Smith, was to review the Loan  
Agreement file.  
4
98. Q. What I see on E-65E is what Mr. Smith told Mr. Quesnel. It says “Mr.  
Smith said that” and there are two (2) paragraphs of what Mr. Smith said.  
A. Yes.  
4
99. Q. What work was done by you or your staff in connection with any kind of  
independent verification of that which Mr. Smith said?  
A. Well for those specific loans there is – the additional work that is specifically  
documented consisted of a review of the Loan Agreement file.”1  
995  
[
1840] Quintal recognized that $40 million was an important amount of money (a  
material amount). Nevertheless, to be satisfied of the collectability of the $40 million  
loans, C&L had relied only on the client’s representations.  
5
10. Q. It’s a material amount.  
A. Forty million dollars ($40,000,000) is an important amount of money.  
11. Q. And to satisfy yourself that this forty million ($40,000,000) was  
5
collectible, is it my understanding that you relied on those two (2) paragraphs and  
the information contained in the Loan Questionnaire?  
A. That’s correct. And I depend on the representation of the client.  
5
12. Q. Where – what representation are you referring to now?  
A. Well, I’m referring to his representations or his discussions on E-65E,  
as well as on the overall Letter of Representation.1  
996  
1994  
1995  
1996  
Hunt, March 28, 1996, pp. 98-100  
Quintal, December 1, 1995, p. 141  
Quintal, December 1, 1995, p. 145  
500-05-001686-946  
PAGE: 374  
[
1841] Quintal did not recall whether he viewed these nine loans differently pursuant to  
1997  
the loans being made in the last month of the year.  
[
1842] Wightman was provided working papers E65c. Wightman expected that the  
loans were listed by C&L audit staff, specifically because they were loans issued in  
December 1990.1  
998  
[
1843] Wightman was aware of the $40 million in new unsecured loans that Castor had  
advanced in December 1990, and he discussed them with Stolzenberg in the year-end  
wrap-up meeting for the 1990 audit.  
2
01. Q. And with respect to the new loans of December 1990, what was the  
discussion that took place?  
A. I just said that we had noted that there were a number of new loans in  
December of 1990, and that they appeared to be unsecured, what was the –  
what was Castor’s view of these loans and what was the nature of them, and so  
on and so forth.  
2
02. Q. And what was the response which was received?  
A. The response that I recall was that they were to – several people at Castor  
knew well that they were the start of new business that Castor was going to  
obtain from these people, that they felt it was a breakthrough in their business.  
2
03. Q. And did you ask who they were?  
A. No.  
2
04. Q. And did you ask whether Castor had done business with any of these  
people before?  
A. No, I think Smith volunteered that they had done business with some of the  
people before or knew them well. I’m not sure whether it was “knew them well” or  
“
had done business with them”.  
2
05. Q. And was there anything said by W.O. Stolzenberg on this issue?  
A. No.  
06. Q. Is there anything that you recall other than what you just said?  
A. No.  
2
2
12. Q. With respect to the new loans that you referred to in December, did you  
ask why these loans were made in December?  
1
997  
998  
Quintal, December 1, 1995, p. 151  
1
Wightman, September 29, 1995, pp. 71-79  
500-05-001686-946  
PAGE: 375  
A. No, not particularly.  
2
13. Q. Are year-end transactions or transactions made during the last month of  
the fiscal year, the object of particular scrutiny during an audit?  
A. I presume that’s why they were noted down and listed.  
2
14. Q. And could you point to a place in the MAPs where they were listed?  
A. Not in the MAPs but in the sheets to the file, which I believe I had at the  
time….It’s E-65C on Castor Holdings Ltd., Part 4 of 5, December 31, 1990.  
2
15. Q. This page, are you saying that this was included as part of the MAPs?  
A. I believe that it was part of the papers that I had with me.  
16. Q. Are you sure?  
A. I’m quite certain, yes.  
2
2
17. Q. In your list of ten (10) points that you prepared in your own handwriting,  
is there any mention of the loans mentioned on E-65C?  
A. No.  
2
18. Q. Why not?  
A. I didn’t think it was – it wasn’t brought forward as being a problem or anything  
like that, it was to give me some general information about the portfolio, about  
the increase in the loans and to be able to discuss the circumstances in a  
knowledgeable way.  
2
19. Q. So you consider that the loans referred to on page E-65C were not  
brought forward as a problem?  
A. That’s correct.  
2
20. Q. What’s the total amount of the loans on page E-65C?  
A. (Witness looking through documents) On the total of the loans it’s one  
hundred and thirty-three million ($133,000,000), Prom. Notes one hundred and  
fifty-four million ($154,000,000) and on issued in December 1990 it was forty  
million ($40,000,000).  
2
21. Q. And you considered that it wasn’t a problem?  
A. I was not aware of any problem.  
22. Q. You were not aware of any problem?  
2
500-05-001686-946  
PAGE: 376  
A. No.  
2
2
23. Q. I refer your attention to page E-65B, the preceding page …  
24. Q. And what is the heading on that page?  
A. Doubtful accounts.  
25. Q. So it says doubtful accounts “as per Coopers & Lybrand”.  
A. Hmm, hmm. Yes.  
26. Q. And under that what does it say?  
2
2
A. “For which no reserve was taken in 1990 or reserve was not enough as per  
C&L.”  
2
27. Q. And what’s the first item right after that?  
A. See next page.  
28. Q. And you consider under the heading of doubtful accounts where Coopers  
2
&
Lybrand considers that there was no reserve taken or the reserve was not  
enough as per Coopers & Lybrand, that this is not a problem?  
A. I asked about these loans generally with Smith and I was told what was  
happening about particularly the new loans. That they were to solicit new  
business for Castor, that Castor was very confident that it was going to result in a  
lot more business for Castor, and they felt it was fine.  
2
29. Q. Could you show me where one word of that is reflected in your notes?  
A. No, I didn’t note that.1999  
[
1844] Wightman did not know who owned the nine companies, whether or not they  
related to specific projects, or what other businesses those borrowers may have had  
with Castor.  
Loans as of December 31, 1990  
[
1845] The nine loans made to the nine companies were identified by C&L in the AWPs  
2000  
In  
with a tick mark underlying the fact that they had been issued in December 1990.  
each completed first page of the LIQ, Quesnel had also used tick marks underlying he  
had looked at the loan file.  
1
999  
000  
Wightman, September 29, 1995, pages 71-79  
PW-1053-15, sequential page 129  
2
500-05-001686-946  
PAGE: 377  
•
•
•
•
•
•
•
•
•
Loan 1167–Pustul Properties2001  
Loan 1168–Ptero Holdings2002  
Loan 1169–Truncal Holdings2003  
Loan 1171–Farl Properties2004  
Loan 1172–Blacking Holdings2005  
Loan 1173-Bioworld Holdings2006  
Loan 1174–Canont Holdings2007  
Loan 1175–Tesia Holdings2008  
Loan 1176-Serotine2009  
Experts positions  
[1846] All experts acknowledged the following facts:  
•
The “Nasty nine loans” loans were part of a circular transaction of $40 million  
relating to the treatment and the payment (so that it could be included as revenue  
for Castor) of capitalized interests owed to Castor by the YH Group.  
•
•
That $40 million of capitalized interest was recognized by Castor as revenue in  
its 1990 consolidated audited financial statements.  
The $40 million loans were part of Castor’s assets as disclosed in its 1990  
consolidated audited financial statements.  
Va n ce  
2
010  
the nine entities had no  
[
1847] Vance opined that a $40 million LLP had to be taken:  
assets and the loans were clearly uncollectible.  
2001  
2002  
2003  
2004  
2005  
2006  
2007  
2008  
2009  
2010  
PW-1053-15, sequential page 210  
PW-1053-15, sequential page 211  
PW-1053-15, sequential page 207  
PW-1053-15, sequential page 212  
PW-1053-15, sequential page 214  
PW-1053-15, sequential page 215  
PW-1053-15, sequential page 213  
PW-1053-15, sequential page 208  
PW-1053-15, sequential page 209  
PW-2908, vol. 1, S-10  
500-05-001686-946  
PAGE: 378  
[
1848] Vance acknowledged that the hardest form of fraud to detect was a fraud that  
2011  
involved collusion between management and third parties.  
[
1849] Asked if there was an issue of fraud in relation to the “Nasty nine loans” and if he  
had taken that into account, Vance said the issue could be raised but it had no impact:  
Well, again, I guess I should comment with respect to the nine (9) year-end  
loans, I certainly... management was not forthright with the auditors, they raised  
the issue and I think the answers given to the auditors were not correct. But  
notwithstanding that, the auditor put his finger on it, identified them for  
follow-up, which is all a junior auditor can do, and that is where they should  
have been dealt with, at the upper levels, between the senior people on the  
engagement team, the manager or partner with the client, and they were not, so  
while I think there was certainly an aspect of fraud with respect to those nine  
(
9) year-end loans, it should have been uncovered by the auditors at the  
point when that hit, and that was a misstatement that... as I said, that's the one  
area where I think certainly there's connotations of fraud, in that nine (9) year-end  
loans, although that was identified by the auditors for proper action, and such  
2012  
action was not taken.  
(our emphasis)  
I did not find very many examples of concealment because all of the  
information was clearly in the books and records that were available to the  
auditors. The one that I think characterizes having... probably being the closest  
was the nine year-end loans because Mr. Smith was not forthright with the  
auditors and I think that probably would fit the handbook definition, and the  
diversion of fees was certainly a fraud upon the company, but I don't think there  
was sort of getting very fine, but it wasn't a fraud upon the auditors. Once  
2013  
again, all of the information was clear in the accounting record.  
(our  
emphasis)  
[
1850] In the case of the “Nasty nine loans”, Vance opined that C&L should have  
uncovered the situation and should have realized it had been a cash circle of $40 million  
2
014  
just looking at Castor’s accounting books and records.  
A.-Most certainly, they should have uncovered it. They may not have  
uncovered all of the intimate details that you're... that have been put forward in  
evidence, but they should have been able to determine that the forty (40) million  
dollars went to Toronto, to Maclane & Kerr, and that was noted, and they did note  
that in the working papers, and just a quick review of the cash receipts journal  
would have shown exactly forty (40) million dollars coming back from the Toronto  
2011  
2012  
2013  
2014  
Vance, May 12, 2008, p. 87  
Vance, March 5, 2008, pp.165-166  
Vance, April 16, 2008, p. 171  
Vance, May 13, 2008, p.35  
500-05-001686-946  
PAGE: 379  
bank account, and then another five hundred thousand (500,000) from York-  
Hannover.  
Q- The Toronto bank account of who?  
A- Of Castor. Coming into the Toronto bank account on virtually the same day.  
Q- Okay. But you...  
A- That, to me, is enough for an auditor to put on the brakes and say... and  
look at the substance, forty (40) million dollars is not petty cash, it has a  
significant impact on the loan portfolio, and then the next step that I think a  
prudent auditor would have done would have been to start seeking out answers  
from the attorneys that were involved as to the nature of the disposition of these  
funds that were sent to them to confirm it was the same money coming back, and  
once you have that, you don't need any of the other details.2 (our emphasis)  
015  
Fr oes e  
[
1851] Froese opined that a $40 million LLP had to be taken2016 : the nine entities had  
no assets and the loans were clearly uncollectible.  
[
1852] Froese said that if someone was to look seriously at the loan files of the “nasty  
nine loans”, one would see “there's common addresses, common owners”. In the  
circumstances that prevailed at the end of 1990 and without a proper disclosure as to  
who the nine borrowers really were, while supposedly well known to Castor, it  
2
017  
constituted a “red flag” to the auditor.  
2
018  
: they approached the  
[
1853] Froese opined that C&L had not complied with GAAS  
audit with insufficient professional scepticism considering that the loans were  
unsecured, all made at the year-end and signed by the same three persons from  
different locations. While C&L initially expressed uncertainty about those loans, C&L  
2
019  
failed to appropriately address such finding thereafter.  
Ros en  
[
1854] Rosen opined that a $40 million LLP had to be taken: the nine entities had no  
assets and the loans were clearly uncollectible.  
[
1855] In his supplemental report,2020 Rosen discussed the issue of fraud.  
2015  
2016  
2017  
2018  
2019  
2020  
Vance, May 13, 2008, pp.39-40  
PW-2941-4  
Froese, December 2, 2008, p. 125  
PW-2941, vol. 4, p. 184  
PW-2941, vol.4, p. 158  
PW-3034  
500-05-001686-946 PAGE: 380  
[
1856] Rosen opined that the evidence of failures to comply with GAAP and GAAS was  
overwhelming and that, in such circumstances, it could not be said that C&L had been  
2021  
victims” of fraud, it could not be that C&L could excuse itself alleging fraud.  
“
There’ s just so many places where Castor management made the evidence fully  
available, and yet, it was ignored by Coopers & Lybrand.2  
022  
[
1857] For the $40 million loans, Rosen said that C&L had picked up the problem but  
that they failed to pursue the matter as they had to.  
Coopers & Lybrand, in essence, picked up the problems with the forty (40) million  
dollars.  
What I objected to in my writings was that it just was not handled well from that  
point on because these are clearly non-cash loans; they're fake loans in so many  
words. So that having them trying to be passed on to York-Hannover, well, most  
of them are out of York- Hannover to start with in the sense that interest was  
recorded as revenue when it not to have (inaudible), and something as to be  
done with it. So it's sitting in in York-Hannover to start with. And all they're doing  
is allocating that. So it would not have a major impact on the fraud angle simply  
because I think the evidence was there long beforehand.2  
023  
Selm a n  
[
1858] Selman opined that the “nasty nine” loans were without substance and should  
2024  
He initially testified that the reversal of the $40 million of loans  
have been reversed.  
would have no apparent effect on the 1990 balance sheet or on the statement of  
2
025  
However, he ultimately admitted that, if YH could not  
changes in net invested assets.  
pay the $40 million of interest owing to Castor, “investments in mortgages, secured  
debentures and advances” would be reduced by $40 million, “general and  
administrative” costs on the income statement would increase from $33,731,000 to  
$
73,731,000 and the $31,200,000 of net earnings would become a loss of  
8,800,000.2  
026  
$
[
1859] If this Court concluded that the $40 million of “nasty nine” loans should have  
been written off, that alone would render the audited financial statements for 1990  
materially misstated, said Selman:  
2021  
2022  
2023  
2024  
2025  
2026  
PW-3034  
Rosen, March 24, 2009, p. 35  
Rosen, March 26, 2009, pp. 142-143  
D-1295, p. 366.  
Selman, May 25, 2009, pp. 209-210.  
Selman, May 25, 2009, pp. 211-214.  
500-05-001686-946  
PAGE: 381  
«
Q-  
Now, assuming that the Court concludes that the forty (40) million dollars  
of loans should have been written off, would that one circumstance in and of itself  
render the audited financial statement for nineteen ninety (1990) materially  
misstated?  
A-  
Yes.»2027  
Levi  
[
1860] Levi stated that «one of the most devious examples of the circular transactions  
has been referred to as the "Nasty Nine" transaction», and that the purpose of the  
“
nasty nine” loans was to make it appear that YHDL, YHDHL, KVWI, 223356 Alberta  
Limited and MLVII were in a position to make payments on their indebtedness to  
Castor.2  
028  
[
1861] Levi further opined that Castor’s 1990 financial statements would not have been  
issued had C&L been aware of Castor’s true financial situation: Castor’s financial  
2
029  
statements would be misstated and misleading.  
Good m a n  
[
1862] Goodman opined that these loans were made for a valid business purpose and  
2030  
were not misstated on the audited consolidated financial statements of Castor.  
[
1863] Goodman’s position is that there was nothing questionable about the “Nasty  
nine” loans:  
«
Q-  
Is there anything whatsoever in the evidence that you have seen or  
considered that makes you question the legitimacy of the nine (9) year-end loans  
described as the nasty nine (9)?  
A-  
From a GAAP perspective, no. I found that, My Lady, the loans had an  
amount that was stated at cost in the books, they were identified in the books.  
The loans, as I understand them from my reading of the testimony, were  
secured. And from my perspective, My Lady, there was nothing that I saw that  
indicated to me that a loss was either probable or estimable.»2  
031  
2027  
2028  
2029  
2030  
2031  
Selman, May 25, 2009, pp. 215.  
D-1347, p. 85.  
Levi, January 28, 2010, pp. 38-39, 46-47.  
Goodman, September 22, 2009, pp. 97-98; October 9, 2009, pp. 113, 156, 160-171.  
Goodman, October 9, 2009, pp. 189-190.  
500-05-001686-946  
PAGE: 382  
[
1864] Goodman testified that C&L were wrong to characterize those loans as doubtful  
accounts, and even claimed that they should have been characterized as good  
loans.2  
032  
[
1865] Goodman’s opinion is based on his belief that the “Nasty nine” loans were  
2033  
guaranteed by Wersebe.  
[
1866] Goodman did not reconsider his opinion, even while admitting in his cross-  
examination that:  
•
nothing in the loan commitment documents or the correspondence file  
suggested that the “Nasty nine” loans were guaranteed;  
•
•
no such guarantees were provided by Wersebe at December 31, 1990;  
in other circumstances where Wersebe did provide a guarantee, the  
2
034  
commitment letters referred specifically thereto.  
[
1867] Goodman continued not to reconsider his opinion,2035 even when advised, inter  
alia that:  
•
•
•
•
Wersebe was not a director or shareholder of Pustul (one of the  
borrowers);2  
036  
the resolution authorizing Pustul to enter the loan transaction made no  
2
037  
reference to Wersebe or to any guarantee;  
the promissory note was not signed by Wersebe or anyone associated  
2
038  
with the YH Group;  
subsequent documents were not signed by Wersebe.2039  
Conclusions  
[
1868] The nine entities were off the shell corporations with no assets. The loans were  
unsecured. Without guarantees, those loans were clearly not collectible.  
2032  
2033  
2034  
2035  
2036  
2037  
2038  
2039  
Goodman, October 26, 2009, pp. 271-272.  
Goodman, October 26, 2009, p. 256. See also D-1312, p. 516, note 989.  
Goodman, October 26, 2009, pp. 260-262, 273-287. See PW-1054-3 in connection with loan 1081.  
Goodman, October 26, 2009, pp. 263-271.  
See PW-1064-1-3, pp. 35-37.  
See PW-1064-1-3, p. 48.  
See PW-1064-1-3, p. 52.  
See PW-1064-1-3, p. 53.  
500-05-001686-946  
PAGE: 383  
[
1869] Quesnel, a C&L staff member, made an initial assessment that the $40 million in  
loans advanced in December 1990 may have required reserves. He realized that it was  
the case even though he was a very junior auditor (student) with no prior experience in  
auditing loans.  
[
1870] Hunt, the Audit Supervisor, responsible for auditing the allowance for doubtful  
accounts, was not aware of Quesnel’s working papers concerning possible doubtful  
accounts. He was the person who had to consider the implications of Quesnel’s working  
papers, and he obviously failed to do so.  
[
1871] Quintal, the Audit Manager, did not know if the audit staff had looked at  
borrowers' financial statements. Regardless of the extent of audit work his staff had  
performed, he did not view the loans differently, as they were issued in December, and  
he accepted the explanation provided by Ron Smith.  
[
1872] No initial work had been performed to test the collectability of these loans other  
than discussions with management. No further audit work was performed to verify those  
management representations.  
[
1873] The $40 million of capitalized interest and fees, which was the origin of the  
creation of these nine loans, should never have been recognized as revenue.  
[
1874] Once the loans were made, a LLP of $40 million was required.  
MEC  
Events of 1990  
[
1875] Virtually, all the second mortgage security position held by Castor on the MEC  
2040  
project had, in turn, been assigned to Castor’s own lenders.  
[
1876] The PAD was sold for $42 million. The costs of the changes required by the new  
project design consumed all the sale proceeds, and the PAD added no value to the  
2
041  
project itself , a fact Goodman acknowledged in that he ascribes no added value to  
the collateral once the PAD was sold.  
[1877] The market was changing.  
2
040  
041  
PW-1053-14, seq. pp. 154-155.  
2
Ron Smith, September 15, 2008, p. 123.  
500-05-001686-946  
PAGE: 384  
[
1878] Just to cover its debt service, MEC needed 44.1 million per annum while it only  
2042  
generated about 18.2 million of revenue.  
[
1879] By November 1990, the MEC was substantially completed from the point of view  
of the retail centre, and it was operational, but remained to be covered the development  
2
043  
of the tunnel, the completion of the PAD and the lease-up position.  
[
1880] On November 4, 1990, MEC opened in a very difficult and crumbling retail  
2044  
market. As of November 1990, “the market was going downhill”.  
[
1881] Instead of opening up with about eighty percent occupancy, the MEC ended up  
opening only with about sixty-seven percent occupancy and a lot of turmoil with the  
2
045  
The project opened up in the most disadvantaged time that it could  
various tenants.  
open up, a situation it never recovered from  
2
046  
.
[
1882] By the end of 1990, the project was coming to substantial completion and the  
Bank of Montreal was concerned about the actual performance of the project to support  
the loan interest on their debt. At that point in time, they came back to Castor and to the  
borrowers and indicated to them that they wanted an additional undertaking from Castor  
to cover any interest shortfalls on the project, due to a lack of income being generated  
by the project2  
047  
.
[
[
1883] The owners were not putting up the funds2048  
1884] Because it was apparent that the project would not generate sufficient net  
.
income to cover the interest obligations on the $125 million first mortgage loan, Castor  
2
049  
On  
was compelled to provide an interest shortfall guarantee in favour of BMO.  
2
050  
December 17, 1990, Smith calculated the Castor shortfall guarantee at $7,636,592.  
As appears from such calculation, the total annual net revenue of the MEC (before  
expenses) was only $10,281,408 and the interest expense payable on the first  
mortgage alone was $17.5 million.  
[
1885] Castor had to support the project until its sale could be completed, which was the  
2051  
.
only way Castor could realize its money back at that point in time  
2042  
2043  
2044  
2045  
2046  
2047  
2048  
2049  
2050  
2051  
Ron Smith, September 15, 2008, p.183  
Ron Smith, September 15, 2008, p.182  
Ron Smith, September 15, 2008, p.195  
Ron Smith, September 15,2008, p.122  
Ron Smith, September 15, 2008, p.123  
Ron Smith, September 15, 2008, pp.165  
Ron Smith, September 15. 2008, p. 166  
PW-1104-11.  
PW-1104-12.  
Ron Smith, September 15, 2008, p.166  
500-05-001686-946  
PAGE: 385  
[
1886] As at December 31, 1990, according to report number 37 from Helyar and  
2
052  
2053  
.
associates , the revised budget for MEC was in excess of $304 million  
1887] Towards the end of the year, there were a lot of activities to try to sell the MEC.  
[
2
054  
Loans as of December 31, 1990  
[
1888] Castor’s exposure to the MEC project, as of December 31, 1990, amounted to a  
2055  
minimum of $180 million  
•
•
•
•
•
•
•
•
•
•
•
Loan 1042: $29 million2056  
Loan 1095: $10 million2057  
Loan 1145: $43.2 million2058  
Loan 1100 : $ 60 million2059  
Loan 1101: $8.9 million2060  
Loan 1103: $7.7 million2061  
Loan 1109: $ 4 million2062  
Loan 1158 : $0.3 million2063  
Loan 1163: $6.8 million2064  
Loan 1146: $3 million2065  
Loan 701,0001/2001 : $7.5 million2066  
2052  
2053  
2054  
2055  
2056  
2057  
2058  
2059  
2060  
2061  
2062  
2063  
2064  
2065  
2066  
PW-1106-C  
Ron Smith, September 15, 2008, pp.195-196  
Ron Smith, September 15, 2008, p.197-198  
D-1312, p. 147 (Goodman calculated $182.4 million)  
PW-1053-15, sequential pages 253-254-255  
PW-1053-15, sequential pages 134 and 294  
PW-1053-15, sequential pages 251-252  
PW-1053-15, sequential pages 241-242  
PW-1053-15, sequential pages 247-248  
PW-1053-15, sequential pages 249-250  
PW-1053-15, sequential pages 243-244  
PW-1053-15, sequential pages 245-246  
PW-1053-15, sequential pages 134 and 245  
PW-1053-15, sequential page 134  
PW-1053-87, sequential page 121  
500-05-001686-946 PAGE: 386  
[
1889] More than $ 117 million was due to Castor’s prior ranking creditors.2067  
Appraisal  
[
1890] On September 11, 1990, Whiting advised Wersebe that reasonable cases could  
be made for valuations of MEC in the range of $225 to $275 million with the following  
cautionary note: «I have no certainty of any buyers interested in the property at any  
2
068  
price let alone this value range.»  
[
1891] Similarly, Whiting informed Wersebe that there was no value in the MEC to  
2069  
support a $5 million loan increase at year-end 1990.  
[
1892] Whiting’s assessment of the value of the MEC was confirmed by the Royal  
LePage appraisal prepared for the first mortgage lenders on or about September 1,  
2070  
990, which established the 1990 MEC value at $241 million . Ron Smith testified  
1
that although Castor had not received a copy of such a revised appraisal until after the  
1
990 audit, it had been received by the first mortgage lender and was later obtained by  
2071  
Castor in May 1991.  
Experts’ opinion  
Va n ce  
[
1893] Vance opined that a minimum LLP of $65 million should have been recorded in  
1
990. To calculate his LLP, Vance started from the appraisal value of $241 million (mid-  
point) established by Royal LePage in its appraisal as of September 1, 1990.  
Fr oes e  
[
1894] Froese calculated a range from $14.9 to $74.5 million and opined that a LLP  
should have been recorded in 1990.  
[
1895] To arrive at those figures, Froese used a range of starting values for the MEC  
project (from $232 to $285 million).  
Ros en  
[
1896] Rosen calculated a range from $66 to $ 83 million and opined that a LLP should  
have been recorded in 1990.  
2067  
2068  
2069  
2070  
2071  
PW-2941, vol. 4, p.181 ($117.8 million) ; D-1312, p. 135 ($120.7 million)  
PW-1159-6.  
PW-1185.  
PW-1108B; Ron Smith, September 15, 2008, p.209;  
R. Smith, September 15, 2008, pp. 208-209.  
500-05-001686-946  
PAGE: 387  
[
1897] To arrive at those figures, Rosen used a range of starting value figures for the  
MEC project, all from the Royal LePage appraisal as of September 1, 1990 ($232 to  
249 million).  
$
Good m a n  
[
1898] Goodman opined that the MEC had an estimated realizable value of $350 million  
at December 31, 1990 and he assessed the value of the Palace II Theatre property at  
11 million. He therefore used a total combined value of $361 million.  
$
[
1899] Based on this assumed valuation, Goodman asserted that a surplus was  
available to the co-owners of the MEC that could serve to offset loan deficiencies on  
other loans in the Castor portfolio.  
[
1900] Although Goodman originally opined that the loan surplus for the MEC was of  
$
79.7 million as at December 31, 1990, he subsequently amended and reduced such a  
2072  
figure to $57.5 million, and finally to $42.5 million, to correct calculation errors.  
[
1901] Based on his $361 million value figure, assuming it was accurate, Goodman  
further testified and acknowledged that only $11.6 million of the alleged surplus would  
accrue to YHDL.2  
073  
Conclusions  
[
1902] Plaintiff experts’ opinions prevail. As of December 31, 1990, the value of MEC  
was in the neighbourhood of $ 241 million, clearly not in the range of $300 to $350  
million. Using the figure of $241 million does not constitute hindsight: had C&L insisted  
on receiving an updated appraisal, as they should have in the circumstances that were  
prevailing in the market and the economy, this information would have been available.  
[1903] Therefore, a LLP of approximately $ 65 million should have been taken.  
[
1904] Goodman’s theory assumes that Castor would not only achieve its full “asking  
price” of $350 million, but that the proceeds received, net of all brokerage costs, closing  
costs and related expenses, would be at least $350 million. Such an assumption is  
totally unrealistic and inconsistent with the reality of the situation. It also ignores the  
enormous costs that Castor would need to incur before this presumed sale would ever  
be finalized and closed.  
[
1905] In fact, even C&L did not adopt the approach advocated by Goodman. In the  
2074  
he indicated that «new appraisal  
year-end notes of Wightman for the 1990 audit,  
2
072  
D-1312, Table CB.3, p. 52; D-1312-1, Tab 4; D-1312-6; Goodman, November 30, 2009, pp. 157-158;  
December 2, 2009, p. 97.  
2073  
074  
D-1312-3; Goodman, November 30, 2009, pp. 157-160.  
PW-1053-12, seq. p. 79.  
2
500-05-001686-946  
PAGE: 388  
coming which is expected to show 300-350 mill based on 11% disc. cash flow.» The  
only appraisal that C&L actually relied upon, however, was the Royal LePage appraisal  
of 1988 in the sum of $275 million.  
[
1906] Any theory which would assume Castor enforcing its security and taking over the  
project by way of “dation en paiement”, would have to further assume that Castor would  
need to repay the first mortgage lenders in an amount up to $125 million as well as the  
2
075  
assignees of the second mortgage debt in an amount in excess of $57 million.  
2
076  
and had no intention of enforcing its security  
Castor could not make such payments  
against the MEC property.  
TSH  
Experts’ positions  
[
1907] All of Plaintiff’s experts came to the conclusion that a LLP was required, their  
minimum LLP being:  
•
•
•
Vance : $51.5 million2077  
Froese: $57.8 to $76.1 million2078  
Rosen: $43.3 to $51.3 million2079  
[
1908] All of Plaintiff’s experts also concluded that the loans should have been placed  
2080  
on a non-accrual basis.  
[
1909] Plaintiff experts opined that the value of the TSH was certainly much lower than  
$
93 million. However, it is by using the $93 million figure that the Plaintiff experts came  
to their minimum LLP. To calculate his high end figure of $76.1 million, Froese used the  
Jones McKittrick appraisal of 1991 acknowledging that it was not yet available in  
Castor’s files: however, he opined that C&L should have asked for an update of the  
appraisal in 1990, taking account of the state of the economy. The Court agrees.  
[
1910] With respect to the TSH loans, other than the Lambert loans totalling $40.1  
2081  
million, Goodman concluded that a $2.8 million deficiency existed at the year end.  
Had he taken account of the Lambert loans, Goodman would have identified a minimum  
deficiency of $42.9 million.  
2
075  
076  
Goodman, November 18, 2009, p. 116; PW-1053-14, seq. pp. 154-155.  
In 1990, Castor disbursed in several tranches because it did not have access to more than $5 million  
in cash. See Goodman, November 2, 2009, pp. 188-189.  
PW-2908, Vol. 1, page S-10  
2
2077  
2078  
2079  
2080  
2081  
PW-2941, vol.1, p.25 and PW-2941-4  
PW-3033, Vol. 2, Appendix A, p. 3.  
PW-2908, Vol. 1, p. 4-I-18 to 4-I-19; PW-2941, vol.2 p. 4; PW-3033, Vol 2. Appendix A, p.34  
D-1312, p. 399  
500-05-001686-946  
PAGE: 389  
[
[
1911] Again, Goodman overcame the deficiency through his theory of off-set.  
1912] To conclude as he did, Goodman valued the TSH at $93 million including surplus  
land. He subtracted current liabilities of $0.3 million and property taxes due at $ 4.4  
2
082  
million. He opined that the value available to Castor was of $ 88.3 million.  
1
990 events  
[
1913] Stolzenberg had initiated discussions in 1989, which resulted in the management  
of the hotel being transferred away from YHHL to a new entity called Transamerica in  
2083  
990.  
1
[
1914] Prychidny agreed to move from YH to Transamerica, as president of this entity.  
Transamerica provided management support for the TSH (similar to what was in place  
for the MLV). All decisions for Transamerica were made by Stolzenberg, and all the  
2
084  
money was provided by Castor.  
[
1915] On-going demands for funds to meet operating expenses as well as business  
2085  
Castor tolerated the situation because the attempts to  
and tax arrears were made.  
sell the hotel or to restructure the TSH had not been successful, leaving Castor with no  
2
086  
choice but to hold the property.  
[
1916] In June 1990, the City of Etobicoke demanded payment in full of the outstanding  
1
988 to 1990 business taxes.2  
087  
[
1917] By November 5, 1990, the TSH year-to-date cash flow shortfall totalled $1.6  
2088  
million, prior to interest payments on Topven’s debt.  
[
1918] The grid note loan increased to $26.4 million with the advances disclosed on the  
loan cards as interest related to the TSH first and second mortgages, interest on the  
2089  
30 million grid note, taxes and payments to Johnson Control.  
$
[
1919] By year-end of 1990 the hotel was recording a loss before debt and the debt  
2090  
itself was “snowballing.”  
2082  
2083  
2084  
2085  
2086  
2087  
2088  
2089  
2090  
D-1312, pp. 399-400  
PW-248D; see also PW-249 and PW-434A; see also PW-442 and PW-439  
R. Smith, September 3, 2008, pp. 107–109.  
For example, PW-447; PW-174G; PW-1080-14.  
R. Smith, September 3, 2008, p. 43.  
PW-447A-1, PW-447  
PW-434B  
PW-167D  
R. Smith, September 3, 2008, pp. 41-43; PW-1084A, PW-1084B and PW-1084C: Summary of Annual  
Interest Obligations Based on Loans Outstanding (PW-424, p. 9, PW-429, p. 14 and PW-430, p. 11,  
respectively).  
500-05-001686-946  
PAGE: 390  
[
1920] The total accumulated deficit of Topven, Topven (88) and Lambert as of  
2091  
December 31, 1990 exceeded $90 million.  
[
1921] In January 1991, Castor advanced Transamerica $5 million under a $20 million  
grid note. The advance was directed to pay the 1990 management fee to Topven (88),  
2
092  
Approximately $3.3 million was paid to  
of which $1.5 million was paid to Castor.  
2
093  
CHIF as interest and fees on the $20 million second mortgage loan.  
Loans as of December 31, 1990  
[
1922] At December 31, 1990, and excluding advances or loans to Transamerica,  
Castor’s exposure to loans relating to the TSH was in excess of $ 125 million.  
Owed to CHL  
•
•
Loan 1107: $40 million2094  
GL066/loan 1148 : $26.4 million2095  
Owed to CHIF  
•
•
•
Loan 576000/3002: $33 million2096  
Loan 576000/3009: $7.1 million2097  
Loan 888002/2003: $20 million2098  
[
[
1923] The accrued interest on Castor’s loans were of $4.7 million2099  
1924] In 1990, Castor also made a loan to Transamerica. The balance owed to Castor  
at year-end was $5.5 million. In his computation of the LLP, Froese took that loan into  
account since he opined that by financing Transamerica Castor was in fact financing the  
TSH operating losses.2  
100  
[
1925] Again, cash circles were used to pay interest on the Lambert loans.2101  
2091  
2092  
2093  
2094  
2095  
2096  
2097  
2098  
2099  
2100  
2101  
PW-2941, vol. 2, p.46 (see also footnotes 73 and 74)  
PW-440  
PW-440A  
PW-1053-15-13  
PW-1053-15-13  
PW-1053-87, sequential pages 126, 135, 148, 157-158  
PW-1053-87, sequential pages 126, 135, 148, 157-158  
PW-1053-87, sequential pages 121, 136  
D-1312, p. 395, footnote 715  
PW-2941, vol.2, p. 39  
Froese, January 27, 2009, pp. 66 and following; Levi, January 14, 2010, pp. 81 and following  
500-05-001686-946  
PAGE: 391  
Appraisal  
[
1926] An appraisal of the TSH, done by Jones McKittrick Services Limited and dated  
May 17, 1991, was forwarded to Smith at the request of Prychidny. The appraised value  
of the TSH, including excess land, was $85.2 million assuming completion of  
renovations estimated to cost between $8 and $13 million. It did not include the parking  
area in the excess land calculation. The excess lands were valued at $2.9 million as  
2
102  
compared to $10 million in the 1988 Mullins appraisal.  
Conclusions  
[
1927] The comments and analysis made under the subheading relating to the TSH in  
the 1988 section of the present judgment apply mutatis mutandis to 1990.  
[
1928] The indebtedness increased and the value of the TSH decreased. At best, the  
market value of the TSH was $93 million, but the evidence shows it was probably closer  
to $75 to $80 million.  
[
1929] Taking into account the best possible scenario as to market value (at $93  
million), and the various figures proposed by all experts (excluding the financing to  
Transamerica), Castor should have recorded a LLP of at least $42.9 million.  
CSH  
Experts’ positions  
[
1930] No dispute between the experts that there was a material loss exposure in  
connection with the CSH in 1990. The dispute is whether GAAP required that a loan  
loss provision be taken.  
[
1931] The Plaintiff’s experts identified the following minimum LLP on the assumption  
that one could rely on the appraisal of the CSH:  
•
•
•
Vance: $ 32 million2103  
Froese: $21.1 to $36.1 million2104  
Rosen: $22.8 to $33.4 million2105  
[
1932] Plaintiff’s experts agreed that the loans should have been placed on a non-  
2106  
accrual basis and that $9.6 million should have been reversed.  
2102  
2103  
2104  
2105  
D-825  
PW-2908, vol.1, p. S-10  
PW-2941-4  
PW-3033, Vol. 2, Appendix G, p.3, Approach A (unadjusted figures).  
500-05-001686-946  
PAGE: 392  
[
1933] Given the state of the economy and the condition of the hotel, Vance used the  
low point of the appraisal rather than the midpoint that he had used in 1988 and 1989.  
[
1934] Using a property value of $55.6 million to which he deducted $1.3 million to cover  
2107 2108  
Goodman calculated a loan deficiency of $23.4 million. However,  
renovations,  
and as he had concluded in 1988 and 1989 and for the same reasons, Goodman  
opined that there was no need to record a LLP in 1990.  
1
990 events  
[
1935] The CSH was overburdened with debt and that, together with double-digit  
interest rates, was the principal cause of the cash deficiencies that dogged the hotel.  
2
109  
[
1936] Loan 1154 was created in February 1990. As a result of capitalization of interest  
and fees, the loan increased to a balance of $9.3 million as of December 31, 1990.  
Loan 1154 was an unsecured loan.  
[
1937] The cash reserve deposit for renovations decreased through charges to the  
deposit account for capitalization of interest and an annual fee charged on the second  
mortgage.2 The planned renovations were not done.  
2111  
110  
[
[
1938] The management contract between Skyview and YHHL was terminated.2112  
1939] The loan covenants were not complied with and interest continued to be  
capitalized.  
[
1940] The unaudited financial statements of Skyview for the year ended December 31,  
1
990, disclosed income before taxes, interest and depreciation of $ 1.9 million and a net  
2113 2114  
Skyeboat incurred a net loss of $ 1.5 million and 321351  
The combined net losses for 1990 were $11.4  
loss of $ 8.2 million.  
2
115  
Alberta a net loss of $1.7 million.  
million.2  
116  
2
2
2
2
106  
107  
108  
109  
PW-2908, vol. 1 page S-10  
D-1312, p. 423  
D-1312, p. 429  
Prychidny, October 14, 2008, p. 45; October 15, 2008, pp. 195-196; Ron Smith, October 2, 2008, pp.  
5
9-60.  
2110  
2111  
2112  
2113  
2114  
2115  
2116  
PW-167S  
PW-467F, bates 15. PW-2941, vol. 2, page 160, paragraph 3.81  
PW-476D  
PW-467E  
PW-466C  
PW-465B  
PW-2941, vol.2, p. 164  
500-05-001686-946  
PAGE: 393  
[
1941] Interest expense recorded in the financial statements of Skyview, Skyeboat and  
2
117  
The shortfall in income to  
3
21351 Alberta amounted to approximately $12.2 million.  
cover debt charges was thus in excess of $10 million while the 1987 PKF appraisal had  
projected income from $4.8 million (in 1988) to $5.9 million (1991).  
[
1942] In their AWPs, C&L “expressed uncertainty about collateral” in relation to loan  
2
118  
C&L put that loan on a list of “doubtful accounts (as per  
1
154 of $9.3 million.  
2
119  
C&L)”.  
Loans as of December 31, 1990  
[
1943] Castor’s exposure to loans relating to the CSH amounted to more than $79  
million as of December 31, 1990.  
•
•
•
•
•
Loan 1097: $25 million2120  
Loan 1154: $9.3 million2121  
Loan 1143: $15.5 million2122  
Loan 1147: $13.6 million2123  
Loan 790002/2005: $16 million2124  
Conclusions  
[
1944] The comments and analysis made under the subheading CSH in the 1988  
section of the present judgment apply mutatis mutandis to 1990.  
[1945] The indebtedness increased and the value of the CSH did not.  
[
1946] Taking account of the various figures proposed by all experts, Castor should  
have recorded a material LLP relating to the CSH in 1990, of at least $21.1 million.  
2117  
2118  
2119  
2120  
2121  
2122  
2123  
2124  
PW-2941, vol.2 , p. 162  
PW-1053-15, sequential page 286  
PW-1053-15, sequential pages 128-129  
PW-1053-15, sequential pages 134, 337; PW-1053-15-14  
PW-1053-15, sequential pages 129, 134, 285-286, 338  
PW-1053-15, sequential pages 134, 289-290  
PW-1053-15, sequential pages 134, 287-288, 339  
PW-1053-87, sequential pages 121, 136; PW-1087-3A  
500-05-001686-946  
PAGE: 394  
OSH  
Experts’ positions  
[
1947] Vance opined that a minimum LLP of $19.2 million should have been recorded in  
1
990. He also opined that all interest and fee revenue on the OSH loans should have  
2125  
been reversed: in 1990, the amount of $3.2 million.  
[
1948] For the OSH, Goodman acknowledged that there was a deficiency in Castor’s  
2126  
loan position of $6.3 million in 1988 and of $3.9 million in 1989.  
[
1949] In his initial Report, Goodman had opined that there was also a deficiency for  
2127  
990: a deficiency of $7.9 million.  
1
[
1950] In his updated Report for trial (D-1312), Goodman no longer provided any  
opinion for 1990 since he had changed his view and no longer considered 687292 to be  
part of the YH Group. This being the case, Goodman acknowledged that there would be  
no right of offset if the Court was to conclude that there was a deficiency in connection  
with the OSH loans.  
Events of 1990  
[
1951] In March 1990, 687292 Ontario Ltd. (“687292”) purchased from Skyline 80 all the  
2128  
assets related to the operations of the OSH for $1 and assumed the debt.  
[
1952] Loan 1166 was granted as of March 23, 1990. In the first year of the loan, $1.4  
2129  
million of interest was capitalized to the principal balance.  
Loans as of December 31, 1990  
[
1953] Castor’s exposure to the OSH amounted to $19.2 million as of December 31,  
1
990.  
•
•
Loan 1165 : $6.5 million2130  
Loan 1166 : $ 12.7 million2131  
2
2
2
2
2
2
125  
PW-2908, page S-10  
126  
127  
128  
129  
130  
D-1312, ES-28.  
Goodman, November 30, 2009, pp. 176-182.  
PW-1053-15-15  
PW-1053-15-2  
500-05-001686-946  
PAGE: 395  
Conclusions  
[
1954] Vance’s opinion prevails. A LLP of $19.2 million should have been recorded in  
1
990.  
TWTC  
Events of 1990  
[
1955] In December 1989, Coldwell Banker had been mandated to attempt to sell the  
office tower lands for the sum of $145 million.  
[
1956] It became apparent, however, that such amount could not be achieved.  
[
1957] In a February 21, 1990 memorandum, the situation was described as “doom and  
2
132  
The conclusion was that the reduced value of the land was $70 to $90 a  
gloom”.  
square foot rather than the $100 per square foot referred to in PW-1069-10.  
[
1958] Later, it became apparent that the market value of the lands was more in the  
2133  
range of $65 per square foot.  
[
1959] C&L determined that loan 1149 was of a high risk nature and that a reserve  
2134  
could be taken on the loan for 1990.  
C&L judge this loan as risky as loan o/s as at Dec 31/1990 and interest  
receivable are 15 092 215.96 (interest being capitalized each month after their  
consider as receivable) and Prom note is only $ 15 000 000  
C&L judge that CHL could take a reserve on this loan. Also C&L expresses  
uncertainty over the nature of the collateral (only a Prom note) but still there are  
other collaterals (see bottom of 149) which are hard to value. So for these  
reasons C&L considers this loan as high risk nature2  
135  
Additional evidence  
[
1960] In his analysis for trial, Whiting estimated a loss to Castor as at September 30,  
1
990, of $27 million for the TWTC loans and of $5.6 million for the TWTC option  
2136  
loan.  
2131  
2132  
2133  
2134  
2135  
2136  
PW-1053-15-2; PW-1053-15-15 (E-195-196)  
PW-1161-31.  
Whiting, February 14, 2000, p. 105  
PW-1053-15, sequential pages, 128, 129, 224-225  
PW-1053-15, sequential page 225  
PW-1186A.  
500-05-001686-946  
PAGE: 396  
Experts’ positions  
[
1961] For the reasons previously explained2137, Vance did not recommend a LLP for  
the TWTC.  
[
[
[
1962] Froese did not opine on the TWTC situation.  
1963] Rosen opined that a minimum LLP of $62 million should have been recorded.  
1964] Goodman concluded that there was a surplus available that could be used to  
offset deficiencies of the YH Group.  
Plaintiff’s argument  
[
1965] In his written submission, and even though the expert Vance did not recommend  
a LLP for the TWTC, Plaintiff argues that the Court should recognize a minimum LLP of  
$
30 million namely for the following reason:  
C&L characterized the “best” TWTC loan made by Castor as being of a high risk  
2138  
nature in 1990.  
The reason this loan was the “best” is that it was made to the  
parent of the project entities as opposed to the grand-parents being YHDL and  
TWDC. Consequently, any monies which would flow to the owners (after the  
payment of all prior ranking debt) would first flow to TWTCI before it could  
possibly get to the shareholders of TWTCI. Once C&L determined (correctly)  
that the TWTCI loan was of a high risk nature, GAAP required that all of the  
TWTC loans be placed on a non-accrual basis and that no further interest be  
recognized until reasonable assurance of collectability existed.2  
139  
Conclusions  
[
1966] The situation of the TWTC project did not improve in 1990, on the contrary. In  
those circumstances, a LLP might have been needed to comply with GAAP.  
[
1967] However, given the Court’s conclusions, she feels it is not necessary to elaborate  
further on that topic.  
Meadowlark  
Experts’ positions  
[
1968] Rosen calculated a LLP equivalent to Castor’s exposure to Meadowlark since he  
concluded that the property had not a greater value than the amount that was due to  
prior ranking creditors.  
2137  
2138  
2139  
See the TWTC sections relating to the 1988 and 1989 financial statements in this judgment  
PW-1053-15, seq. pp. 224-225.  
Plaintiff’s written submissions July 8, 2011, p.76  
500-05-001686-946  
PAGE: 397  
[
1969] Goodman calculated a deficiency of $0.1 million taking into account a market  
2140  
value of $22.4 million and prior ranking debts of 17.4 million.  
Events of 1990  
[
1970] Castor continued to fund the taxes owed by Meadowlark as well as operating  
expenses and mortgage payments to BMO so that the property would not be lost.  
[
1971] By August 1990, Castor understood that if the property was sold as is «in the  
nd  
presently depressed real estate market», the entire 2 mortgage of $7 million would  
have to be written off.2  
141  
[
1972] In January 1991, BMO put the project into default and claimed about $16.1  
million in principal and interest due as at December 31, 1990 from the owners of  
2
142  
Meadowlark (Leeds, Raulino Canada and YHDL).  
[
1973] A few months later, Meadowlark was sold for the purchase price of $11  
2
143  
million and Castor took a complete loss on its loans.  
[
1974] Quesnel, the senior auditor responsible for the investment section in the 1990  
audit, namely wrote the following in his AWPs, on page E-65b:  
Meadowlark Park Shopping Center (see E110)  
Shopping Mall located 2KM away from West Edmonton Mall in ALTA  
CHL W/D 2 000 000 on this loan in 1990  
R. Smith said that appraisal could be around 20M$ actually (Total value of loans  
1
9 700 000). Since appraisal is not based on an independent study C&L judges  
that appraisal could be even lower. (West Edmonton Mall is expending every  
year). Additional reserve would be in order.2  
144  
Loans as of December 31, 1990  
[1975] Castor’s exposure was of $5 million further to a LLP of $ 2 million taken in 1989.  
Conclusions  
2140  
2141  
2142  
2143  
2144  
D-1312, pp. 260-261  
PW-1112-18.  
PW-1112-19.  
PW-1112-20.  
PW-1053-15, sequential page 128  
500-05-001686-946  
PAGE: 398  
[
1976] Probabilities are that a LLP should have been taken for Meadowlark in 1990  
given the state of the economy and the history of that mall and of its immediate  
competition.  
[
1977] However, given the Court’s conclusions, she feels it is not necessary to elaborate  
further on that topic.  
DT Smith  
Positions in a nutshell  
Pla in t iff  
[
1978] Plaintiff argues that by December 31, 1990 and during the months of January  
and February, 1991, the slow-down in sales and absorption rate, and the depressed  
selling prices, particularly for the higher priced homes as the DT Smith homes, was  
notorious and readily available from information published in the newspapers, from  
promoters, sales agents, and even other accounting firms.  
[
1979] Plaintiff submits that loan loss provisions in excess of $50 million should have  
been disclosed for the loans extended to the DT Smith Group.  
Defen d a n t s  
[
1980] For the year ended December 31, 1990, Defendants acknowledge that  
Strassberg came to the conclusion that the DT Smith Group had to record a huge LLP  
in its financial statements. However, they argue that Strassberg came to such a  
conclusion with the benefit of hindsight, and only in February 1992, rather than in  
February 1991.  
[
1981] Defendants submit that at the end of 1990, and without using hindsight, Castor  
had a security surplus on its loans to the DT Smith group.  
Evidence  
Pr ior t o 1 9 9 0  
[
1982] David T. Smith set up a number of companies whose sole purpose was to  
develop and sell residential real estate projects in Southern California. Each of these  
companies was nominally capitalized.  
[
1983] The projects were either development/construction projects, or land held for  
future construction projects expected to be initiated in a very short time.  
500-05-001686-946  
PAGE: 399  
[
1984] CHIO began lending money to the various D.T. Smith entities in 1987, and  
continued to do so throughout 1988, 1989 and 1990. Castor never analyzed the  
creditworthiness of the DT Smith group of companies but merely relied on Stolzenberg’s  
knowledge of DT Smith.2  
145  
[
1985] The DT Smith group was financially totally dependent on Castor for its liquidity  
2146  
needs.  
[
1986] All the CHIO loans to the D.T. Smith entities were extended, administered and  
monitored out of Castor’s Montreal offices. Ron Smith, the Senior Vice President of  
mortgages, was the individual responsible for administering and monitoring those loans.  
[
1987] For each construction project, the loans by CHIO to each of the D.T. Smith  
entities were structured as follows:  
•
•
There was a first mortgage loan commitment letter and loan agreement between  
CHIO and the D.T. Smith entity, with terms and conditions obliging the borrower  
to put up a certain amount of equity for the purchase of land, placement fees,  
2
147  
pre-development costs, general and administrative expenses, etc.  
Concurrently, CHIO and the D.T. Smith entity would sign a second mortgage  
loan commitment letter and loan agreement, whereby CHIO undertook to pay all  
the sums which the borrower was itself committed and obliged to pay according  
2
148  
.
to the first mortgage loan agreement  
[
1988] Therefore, and in fact, Castor was financing 100% of pre-development and  
construction costs (hard and soft costs), cost overruns and interest and fees.  
[
1989] The D.T. Smith Companies ran no risk of losing anything and the entire risk for  
the D.T. Smith projects vested with Castor.  
•
•
•
the D.T. Smith Companies were nominally capitalized;  
the D.T. Smith Companies had no assets other than the title to the projects;  
Neither David T. Smith personally, nor anyone else, invested any capital into  
any of the D.T. Smith projects, or injected any funds;  
•
Any profit would accrue to the D.T. Smith borrower, but any loss would be  
borne by Castor.  
2145  
2146  
2147  
2148  
R. Smith, June 10, 2008, p. 31.  
D-1324.  
For example see PW-1115-2B  
See for example PW-1115-3B  
500-05-001686-946  
PAGE: 400  
[
1990] David T. Smith and his wife, Norma, each owned a 50% interest in each of the  
2149  
D.T. Smith entities . David T. Smith personally guaranteed each of the CHIO loans to  
a D.T. Smith entity.  
[
1991] Each and every one of the loan agreements between Castor and the DTS  
borrowing entities contained a covenant obliging the borrower and guarantor, David T.  
Smith, to furnish to Castor their respective financial statements within 120 days of fiscal  
year-end (December 31).2  
150  
[
1992] The audited combined financial statements of the DT Smith Companies, with the  
audit opinion of Rogoff & Company, were furnished to Castor for each of the 1987, 1988  
2
151  
and 1989 fiscal years, and were kept in C&L’s Montreal files.  
[
1993] As at year end 1987, CHIO’s exposure to the D.T. Smith Group of Companies  
2152  
,
was $57,000,000 (Canadian Funds), out of Castor’s total portfolio of $773,000,000  
or 7.4%2  
153  
.
[
1994] As at year end 1988, CHIO’s exposure to the D.T. Smith Group of Companies  
2
154  
155  
was $103 million, out of Castor’s total portfolio of $1,000,600.00, or 10.2%  
.
[
1995] As at year end 1989, CHIO’s exposure to the D.T. Smith Group of Companies  
2
was $218 million, out of Castor’s total portfolio of $1,424,000.00, or 15.3%  
.
[
1996] During 1988 and, for the most part of 1989, the residential real estate market in  
Southern California was hot; it started to cool off in the latter part of 1989, and continued  
its slowdown into the spring of 1990.  
[
1997] DT Smith had signed agreements with Eton Properties, whereby 50% of the  
2156  
The  
profits realized from the DT Smith projects would be paid over to Eton.  
agreements were dated June 14, 1989, but most were effective from late 1988 and  
early 1989, depending on the property. Those agreements provided that, in the event  
that Eton Properties advanced funds to a project that DT Smith did not match, DT  
2
157  
Smith’s equity in the project would be reduced to a minimum of 32.5%.  
[
1998] David Smith testified that the Eton Properties’ agreements were entered into at  
the request of Stolzenberg and in the following context:  
2149  
2150  
2151  
2152  
2153  
2154  
2155  
2156  
2157  
PW-2324 to PW-2336-1; Moscowitz, March 10, 2000, at pp. 2323-2347  
See, for example, PW-1115-2B.  
R. Smith, June 10, 2008, p. 38; PW-1113D; PW-1113E.  
This amount includes the $100 million debentures  
This % represents a minimum (taking account of the $100 million debentures)  
This % represents a minimum (taking account of the $100 million debentures)  
This % represents a minimum (taking account of the $100 million debentures)  
PW-1398, PW-1404, PW-1405 to PW-1411.  
See PW-1409, sections 4.2 and 5.1  
500-05-001686-946  
PAGE: 401  
A. There came a time in early 1989 when Mr. Stolzenberg approached me in one  
of his visits, and asked me to — I shouldn't say asked me – told me that the way  
he was financing it now, the 100 percent financing that he was giving to me, he  
didn't think was acceptable anymore, and that he wanted a larger interest in the  
projects, that he wanted to take a 50- percent interest in the ongoing projects.  
And he told me that if I would not be amenable to that, that there were lots of  
other people who would want to be financed, and that he would not be able to  
continue financing us under these terms. I told him, after some thought, that I  
would be amenable to doing that, but that I would like to get off the guaranties. If  
I'd be able to get off the personal guaranties, I would be amenable to that.  
Q. These are the personal guaranties for what?  
A. For Castor.  
Q. Whose guaranties?  
A. My personal guaranties. That if I was not responsible for those guaranties any  
longer, that I would do that. And he said that that was acceptable to him, that this  
new entity, which eventually was called Eton, would be responsible for putting up  
the necessary capital, if there was ever a call made for capital. And if there was a  
call made for capital, then Eton would put up the sufficient monies so a call  
wouldn't be made; and if I didn't put up my pro rata share of the monies that were  
called, then my interest would fall from a 50 percent interest to a 32.5 percent  
interest. So in the worst case scenario, I would still have a 32 and a half percent  
interest. After reflecting upon that, I thought it was a wonderful transaction for  
me. I no longer had personal guaranties that would be called upon, I was getting  
1
00 percent financing, more than 100 percent financing, because they not only  
financed the property, but they also financed our general and administrative  
expenses so that I was getting basically 110 percent financing, and only had an  
upside and didn't have any down side. I also asked him that if he was taking such  
a large interest now in the entity, not only was he now getting the fees, but now  
he's getting a 50-percent interest. I asked him whether or not he can – he would  
return a portion of the fees to me as well. And he said he would think about it and  
that he would — eventually he said he would return a portion of the fees on an  
2158  
ongoing basis.”  
[
1999] Strassberg, DT Smith auditor, explained those agreements with Eton Properties  
as follows:  
Mr. Moscowitz had informed me that they were making arrangements to take on  
a partner who was going to guarantee them some financing in exchange for 50  
percent of the profits…  
2158  
David Smith, March 14, 2000, pp. 94-97  
500-05-001686-946  
PAGE: 402  
Mr. Moscowitz, who gave these to me, just informed me that they were doing this  
2159  
to protect their financing.  
[2000] The Tennis Villas agreement stated namely:  
Upon the terms and conditions contained herein, the Company hereby retains  
and engages Eton to, and Eton hereby agrees to, provide sufficient funds to the  
Company to prevent the Company from being in a monetary default under the  
terms of the Loan Agreements.2  
160  
[
2001] Out of the profits realized from the Tennis Court Project, an amount of $1.4  
2
161  
.
million was paid to Eton Properties  
[
2002] Castor’s development loans to the DT Smith properties in California were  
characterized by delays and cost overruns.  
1
9 9 0  
[
2003] As at December 31, 1990, DT Smith had seven projects under development and  
seven properties for future development. One project, the Tennis Court Villas, had been  
completed, at a profit.  
•
The seven remaining development projects were: Chino Hills, Dove Canyon 1,  
Dove Canyon II, Wood Ranch II, San Marcos, Laguna I and Laguna II.  
•
The seven properties for future development were: Ritz Pointe, Rancho  
California, Rancho Parcel 2, Rancho Parcel 5, Walker Basin and Bonanza  
Homes.  
[
2004] As it had been the case in previous years, the DTS group furnished Castor with  
data that included cash flows prepared monthly for each of the D.T. Smith Projects, as  
well as information with respect to the number of sales and the sale prices, all of which  
was in Castor’s files.  
[
2005] By May, 1990, there was a significant number of unsold homes in the various  
D.T. Smith construction projects. To sell off the standing inventory, David T. Smith  
decided to proceed with voluntary auctions.  
[
2006] An auction was held in six D.T. Smith construction projects. For the first two  
auctions, the auctioned units realized close to the projected results, and the inventory of  
unsold houses was reduced; however, succeeding auctions proved to be considerably  
less successful.  
2159  
2160  
2161  
Strassberg, November 27, 2000, pp. 706-707  
PW-1409, section 2  
D-430.  
500-05-001686-946  
PAGE: 403  
•
•
•
•
•
•
The auction at Laguna II took place on August 26, 1990. 20 units were sold at an  
average price per unit, net of commissions and other selling costs, of $ 278,000.  
2
162  
The auction at San Marcos took place on September 9, 1990. 45 units were sold  
at an average price per unit, net of commissions and other selling costs, of  
$
199,000.2  
163  
The auction at Dove Canyon I took place on October 6, 1990. 14 units were sold  
at an average price per unit, net of commissions and other selling costs, of  
$
230,000.2  
164  
The auction at Dove Canyon 2 took place on October 6, 1990. 21 units were sold  
at an average price per unit, net of commissions and other selling costs, of  
$
269,000.2  
165  
The auction in Chino Hills took place on October 13, 1990. 36 units were sold at  
an average price per unit, net of commissions and other selling costs, of  
$
243,000.2  
166  
The auction in Wood Ranch II took place on October 21 1990. 44 units were sold  
at an average price per unit, net of commissions and other selling costs, of  
$
171,000. 2  
167  
[
2007] The auctions had a negative impact on the remainder of the D.T. Smith  
construction projects, particularly on the sale prices realized for the D.T. Smith homes,  
at sales post auctions.  
[
2008] By late 1990, projects were in breach of the loan covenants as a result of cost  
2168  
over-runs.  
[
2009] The market conditions were poor and deteriorating throughout 1990 and the  
2169  
status of the DT Smith projects was precarious; Ron Smith testified to that , and so  
2162  
2163  
2164  
2165  
2166  
2167  
2168  
2169  
PW-1116-12  
PW-1116-11  
PW-1114-14  
PW-1114-14  
PW-1119-11  
PW-1118-12; Ron Smith, June 11, 2008, pp. 41-42  
See for example: PW-1117-5 and PW-1114-11  
R. Smith, June 10, 2008, pp. 61-62, 65, 154-156, 176-177; June 11, 2008, pp. 88-89, 154-155;  
Construction Projects: Re: Dove Canyon II – June 10, 2008, pp. 82-84, 88-90; Re: Dove Canyon I -  
June 10, 2008, p. 187, pp.201-202, 210-211; Re: Laguna II – June 10, 2008, pp. 216-219; Re: San  
Marcos (The Fairways) – June 11, 2008, pp. 8-12, 32-34, 37-38; Re: Wood Ranch II (Village on the  
Green) – June 11, 2008, pp. 41-42, 63-65, 67-69; Re: Chino Hills (Galloping Hills) – June 11, 2008,  
pp. 74-75, 84-85; Pre-Development Projects: Re: Rancho California Miramosa – June 11, 2008, pp.  
500-05-001686-946  
PAGE: 404  
did David Smith2 , Moscowitz  
170  
2171  
2172  
and Strassberg , who were all personally involved  
with the loans to the DT Smith Group, and the status of the DT Smith projects,  
throughout 1990 as well as January and February, 1991.  
[
2010] The real estate market continued to deteriorate throughout 1990. By December  
1, 1990, home prices in Southern California were dropping significantly, particularly in  
3
Orange County, where the D.T. Smith projects were located; those that were hit the  
hardest were the high-priced homes.  
[
2011] Talk of a recession was prevalent, and experts were predicting, publicly, that the  
residential real estate market in California would take months to recover. Several  
2
173  
and many  
articles from the Wells Fargo Monitor retained in Castor’s files in Montreal  
extracts from the Los Angeles Times, real estate section attested to those deteriorating  
conditions 2  
174  
.
[
2012] C&L was aware of the deteriorating conditions of the real estate market  
prevailing in North America in 1990.  
•
In their “Tips & Tidbits” number 155, dated July 23, 1990, under the heading  
Valuation of Real Estate”, C&L specifically addresses the «real estate market  
“
problems», that it is «inappropriate to assume an imminent recovery in real  
estate values” and that “we are in one of those periods where it is even more  
than usually important to put an objective and professional approach to  
valuation matters above maintaining the best possible relationship with  
2
175  
clients.»  
•
In the same vein, in C&L’s Accounting and Auditing Memorandum, AM50,2176  
C&L cautioned its auditors that «the company may make a reasonable case  
that declines in value are temporary and write-downs are unnecessary.  
However, this approach should be accepted only if it appears that the  
9
1-95, 103; Re: Rancho Parcel 2 – June 11, 2008, pp. 120-122; Re: Rancho Parcel 5 – June 11,  
008, pp. 127-128, 136-137; Re: Ritz Point – June 11, 2008, pp. 148-151; Re: Circle R. Ranch –  
2
June 11, 2008, pp. 136-137; Re: Walker Basin – June 11, 2008, p. 156.  
2170  
2171  
2172  
DT Smith, March 14, 2000, pp. 168-175; March 17, 2000, pp. 778-780; October 31, 2000, pp. 1853-  
1
858, 1881, 1883, 1958-1959, 1975-1977, 1984-1986, 1998-1999, 2063-2064, 2080-2081.  
Moscowitz, December 14, 1999, pp. 202-203, 205-209, 236-237, 242-243; December 15, 1999, pp.  
4
63, 526-528; March 8, 2000, p. 1793; March 10, 2000, pp. 2349-2350.  
Strassberg, November 1, 2000, pp. 123-124; November 2, 2000, pp.228-232, 256, 259-266;  
November 27, 2000, pp. 556-557; November 28, 2000, p. 896-897, 901; December 1, 2000, p. 1544-  
1
545, 1550-1552, 1555-1556; February 6, 2001, p. 1910-1911, 1913.  
2173  
The Wells Fargo Monitor Publications were produced by Plaintiffs as PW-1113F, PW-1113H, PW-  
1113I; Defendants produced additional publications of the Wells Fargo Monitor as D-177, D-178, D-  
79, D-181, D-183 and D-183-1. See also R. Smith, June 10, 2008, p. 46.  
1
2174  
2175  
2176  
PW-2908, vol.2, page H-57; Strassberg, November 28, 2000, pp. 899-905  
PW-1420, Tab 29.  
PW-1420, Tab 33.  
500-05-001686-946  
PAGE: 405  
company can maintain itself financially for the expected period until prices  
recover».  
[
2013] As at December 31, 1990, each and every one of the DT Smith construction  
projects was far behind schedule: houses were not selling at the rate projected, (if at  
all), the prices achieved at the auctions were well below expectations, the series of  
auctions had lowered the sale prices that could be achieved post auction, and the  
2
177  
residential real estate market in Southern California was bad, and getting worse.  
[
2014] By December 31, 1990, the Ritz Pointe project for which CHIO loan balances  
amounted to $30.7 million, was still in a pre-development holding stage and no  
2
178  
Moreover, the City had limited the  
improvements to the project site had yet begun.  
2
179  
density of the project (154 units instead of 191).  
by August of nineteen ninety (1990), nothing had happened, we agreed not to  
start the project and that was further extended over to September of nineteen  
2180  
ninety-one (1991).  
[2015] For Ritz Pointe, two appraisals reports had been obtained:  
•
a January 12, 1990 report from White appraisal with an “as is” value (mass  
2181  
graded) as of January 3, 1990 of $26 million;  
•
a Clarion Appraisal Group Inc.2182 report dated April 27, 1990 with two values:2183  
o an “as is” value of $29 million.  
o a value as if finished site, with finish grading and finished lots, ready for  
construction of houses of $35 million.  
o With respect of the market conditions under which they were reporting,  
Clarion which is a company from Florida, wrote:  
“
The market for land for residential development is currently in a  
pronounced inflationary condition and recent demand for housing  
has been very strong in the Dana Point, California area. There is  
2
177  
Ron Smith, June 10, 2008; Ron Smith, June 11, 2008; Ron Smith, September 24 2008; Ron Smith,  
March 27, 2009  
2178  
2179  
2180  
2181  
2182  
2183  
Goodman, October 29, 2009, pp. 19-20  
Ron Smith, June 11, 2008, pp.146 and following; Goodman, October 29, 2009, pp. 21-22  
Ron Smith, June 11, 2008, pp.149-150  
PW-1124-6  
Based in Florida  
PW-1124-8  
500-05-001686-946  
PAGE: 406  
no way for the appraiser to estimate how long this condition will  
continue…”2  
184  
[
2016] By December 31, 1990, the Rancho California project was also in a pre-  
2185  
Moreover, there  
development stage and no improvement on the site had yet begun.  
2
186  
were environmental issues not yet solved.  
At that point, December thirty-first (31st), nineteen ninety (1990), we had loans  
outstanding of twenty-one point one hundred fifty-three thousand (23.153) and  
we still had a long way to go to even mass-grade the lots. We hadn't even started  
2187  
that at that point in time.  
[
2017] An appraisal report dated February 12, 1989, prepared by Investors Appraisal &  
Realty Inc. provided the following market values:  
•
•
“As is” value: $13 million.  
As if improved with rough grading, ready for final site preparation for finished lots,  
2
188  
ready for construction: $33.2 million.  
•
With respect of their proposed value of $33.2 million, the appraisers however  
wrote:  
Because there is not enough data determining the scope of the work to  
rough grade, especially since the topography of a substitutable property  
is indeterminate, the appraiser cannot possibly calculate more than very  
approximately what those costs might be. As a result, several developers  
were questioned as to what those costs might typically be. These costs  
were compared to those estimated and adjustments made accordingly.  
As a result, the estimated value of the land rough graded, is only  
furnished approximately, and with the necessarily limited accuracy a  
limiting condition.”  
[
2018] As at year end 1990, CHIO’s exposure to the D.T. Smith Group of Companies  
was $237,000,000 out of Castor’s total portfolio of $1,690,000.00, or 14%.  
[
2019] At the end of 1990 and the beginning of 1991, the projected unit cost for the  
projects where auctions had taken place exceeded the average unit sale prices  
achieved to date:  
2184  
2185  
2186  
2187  
2188  
PW-1124-8  
Ron Smith, June 11, 2008, pp. 89 and following; Goodman, October 29, 2009, pp. 19-20  
Goodman, October 29, 2009, p.22  
Ron Smith, June 11, 2008, p.93  
PW-1120-6  
500-05-001686-946  
PAGE: 407  
•
•
•
•
•
•
As at January 3, 1991, DT Smith and Castor projected that the total costs of the  
Wood Ranch II project, 156 units, would be $35.4 million, or an average per unit  
of $227,0002  
189  
.
As at January 31, 1991, DT Smith and Castor projected that the total costs of the  
Chino Hills project, 136 units, would be $38.3 million, or an average per unit of  
190  
.
$
282,0002  
As at February 1, 1991, DT Smith and Castor projected that the total costs of the  
San Marcos project, 126 units, would be $37.4 million, or an average per unit of  
191  
.
$
297,0002  
As at February 5, 1991, DT Smith and Castor projected that the total costs of the  
Dove Canyon I project, 116 units, would be $36.2 million, or an average per unit  
of $312,0002  
192  
.
As at February 5, 1991, DT Smith and Castor projected that the total costs of the  
Dove Canyon 2 project, 106 units, would be $39.3 million, or an average per unit  
of $371,0002  
193  
.
As at February 4, 1991, DT Smith and Castor that projected the total costs of the  
Laguna II project, 111 units, would be $40 million, or an average per unit of  
194  
.
$
361,0002  
[
2020] Moscowitz described the economic environment of the DT Smith projects in 1990  
as follows:  
The first quarter slowed down tremendously, and we started considering  
alternative methods of marketing. And it got worse from that point on. The  
second quarter was even slower, and by the third quarter of 1990, we were  
losing more sales than we were gaining. So we were in a negative sales volume  
position. People were dropping out of contracts they had in place even the  
quarter before, because prices were coming down. And by the time of January  
and February 1991, which we’re working on in 1990 as accountants for the  
company, it was very obvious that we were in a severe recession and there was  
no market that existed at that point.  
Now, we were hopeful and always hopeful that it was going to be short and we  
would immediately go back to large volumes and great sales prices. We were  
hopeful, but the reality was it didn’t happen (…)  
2189  
2190  
2191  
2192  
2193  
2194  
PW-1118-16  
PW-1119-14  
PW-1117-8  
PW-1115-13  
PW-1114-19  
PW-1116-17  
500-05-001686-946  
PAGE: 408  
.
.. And as we move through ’90, the auctions become less and less successful.  
Our last auction, I think, was at Dove Canyon, or the second to last auction was  
our Dove Canyon property, and we had to pull some of the houses out of the  
auction because there wasn’t enough interest in auctions even at that point.  
And so during this process going down from spring of 1990 to December of 1990,  
the prices are going down and down and down. Once we’ve had these auctions,  
the real negative — the answer to your question is that we were never really able  
to sell a house at an increased price over that auction price which was  
somewhere around 50 or 45 percent under what we were asking for those  
houses. So it was a significant impact in pricing.2  
195  
[
2021] Actual results to mid-February, 1991, disclosed that DT Smith was not achieving  
2196  
its anticipated numbers of closings or its projected cash flows.  
[
2022] During February, 1991, Strassberg completed his audit field work for the year  
ended December 31, 1990. In a meeting with management (DT Smith and Moscowitz),  
he advised same that, in view of the poor results of the auctions, of the lower than  
anticipated sale prices, of the slowdown in the rate of sales, and of the decline in the  
residential real estate market, he had concluded that the combined financial statements  
of the DT Smith Group of companies must disclose a loan loss provision of US$40 to 60  
million.  
[
2023] Strassberg explained as follows what triggered his concerns:  
The trigger for my concern was the fact that they weren’t selling homes at a rate  
that remotely approached their own forecast. The fact that they sold at auctions  
doesn’t by itself cause a trigger, because the auctions could have been very  
successful and they could have sold double the amount of homes they were  
projecting at prices far in excess of what they hoped to get. When that didn’t  
happen and they sold these homes at significantly lower prices, the fact that they  
sold them at lower prices would cause my concern. The fact that in between the  
periods from the end of ’89 until the end of 1990, that for the most part the only  
home sales they did have were at auction and that they were at significantly  
lower prices than they hoped to get, would also cause me to have some concern  
about their ability to sell homes at a profit on a going forward basis.2  
197  
[
2024] Strassberg, of Rogoff & Company, who was the partner in charge of the audit of  
the D.T. Smith Group of Companies, considered the D.T. Smith entities and projects to  
be in serious financial difficulties. He refused to sign, or issue, an audit opinion for the  
2
195  
196  
Moscowitz, December 14, 1999, pp. 205, 206 and 209  
2
For example, see: PW-1119-15 (Chino Hills); PW-1114-19 (Dove Canyon II); PW-1117-8 (San  
Marcos); PW-1116-17 (Laguna II)  
2197  
Strassberg, November 28, 2000, pp. 896-897 (see also Strassberg, November 2, 2000, p. 261)  
500-05-001686-946  
PAGE: 409  
financial statements of the D.T. Smith Group, unless they disclosed a loan loss  
provision in the range of US$40 to US$60 million.  
2025] Strassberg,2  
198  
DT Smith  
2199  
and Moscowitz all support the assertion that  
2200  
[
Strassberg reached this conclusion in February, 1991, and the Court finds those  
testimonies credible and reliable.  
[
2026] At the request of David Smith and Moscowitz, who both hoped that the real  
estate market conditions would improve in 1991, the David T. Smith Group combined  
financial statements for December 31, 1990 were not finalized. Their hopes did not  
materialize; the residential real estate market in Southern California did not improve in  
1
991, and the results remained far below projections.  
[
2027] The audited combined financial statements of the DT Smith Companies for 1990,  
2201  
were not finalized and issued until  
with the audit opinion dated February 2, 1992,  
February 1992. These financial statements disclosed a net loss of US$56,135,673 and  
the independent auditor’s report by Rogoff & Company raised “substantial doubt about  
the company’s ability to continue as a going concern.”  
[
2028] At the end of May or at the beginning of June, 1991, and for the very first time,  
2202  
David T. Smith prepared and forwarded to Castor a personal statement of net worth.  
One of the assets listed was a house, having a stated value of $12,500,000.00; such  
house was not the property of David T. Smith, but rather that of his wife, Norma. Cash  
listed in the amount of $6,450,000.00 was restricted and therefore, not available to  
creditors (including CHIO) of David T. Smith.  
Loan as of December 31,1990  
[
2029] Castor’s total exposure to DT Smith loans as of December 31, 1990 amounted to  
US $217.6 million:  
•
•
•
Laguna I – U.S. $1.6 million2203  
Laguna II – U.S. $ 18.6 million2204  
San Marcos – U.S. $17.5 million 2205  
2
198  
Strassberg, November 2, 2000, pp. 261-263, 265-266, 271-272; November 28, 2000, pp. 801-803,  
8
19, 830-831, 863-864, 931-932; November 29, 2000, pp. 1143, 1152; December 1, 2000, p. 1631;  
February 6, 2001, pp. 1910, 1913; February 9, 2001, pp. 2608-2609.  
DT Smith, March 14, 2000, pp. 189-191.  
2
199  
200  
2
Moscowitz, December 14, 1999, pp. 193, 198-200, 217; December 17, 1999, pp. 1053-1055; March  
9
, 2000, pp. 2114-2115; March 13, 2000, p. 2458.  
2201  
2202  
2203  
2204  
PW-2319, bates p. 000003.  
D-175; D-175-1 D-175-2  
PW-1053-81, sequential page 79  
PW-1053-81, sequential page 79  
500-05-001686-946  
PAGE: 410  
•
•
•
•
•
•
•
•
•
•
•
Wood Ranch 2 – U.S. $ 16.2 million2206  
Dove Canyon 1 – U.S. $ 16.2 million2207  
Dove Canyon 2 – U.S. $ 20.6 million2208  
Chino Hills – U.S. $ 17.7 million2209  
Ritz Point – U.S. $ 30.7 million2210  
Rancho Parcel 2 – U.S. $ 9.9 million2211  
Rancho Parcel 5 – U.S. $ 10.2 million2212  
Rancho California – U.S. $20.2 million2213  
Circle “R” Ranch – U.S. $ 13.1 million2214  
Walker Basin – U.S. $ 11.5 million2215  
Bonanza Homes – U.S. $ 1.6 million2216  
Experts’ opinions  
Va n ce a n d Fr oes e  
[
2030] According to Vance, the minimum loan loss provision for the loans extended to  
the DT Smith Companies was CDN$47.7 million for the DT Smith construction projects,  
plus CDN$8.3 million for the Rancho California pre-development loans. The details are  
2
217  
:
noted in the following charts, in US$  
Construction projects (in US$)  
2205  
2206  
2207  
2208  
2209  
2210  
2211  
2212  
2213  
2214  
2215  
2216  
2217  
PW-1053-81, sequential page 79  
PW-1053-81, sequential page 79  
PW-1053-81, sequential pages 78, 79,  
PW-1053-81, sequential pages 78, 79A  
PW-1053-81, sequential pages 78, 79A  
PW-1053-81, sequential pages 78, 81  
PW-1053-81, sequential pages 81  
PW-1053-81, sequential pages 78, 81  
PW-1053-81, sequential pages 78, 80  
PW-1053-81, sequential pages 79  
PW-1053-81, sequential page 80  
PW-1053-81, sequential page 79  
Conversion : Cdn. at 1.16 (PW-2908, vol.5)  
500-05-001686-946  
PAGE: 411  
Project  
Total net proceeds  
per Vance)  
Total costs with  
Castor’s financing  
costs included  
Minimum  
(
Surplus  
(
deficiency)  
(per Vance)  
Laguna II2218  
$34 million  
$29 million  
$40 million  
($6 million)  
San  
$37.5 million  
($8.5 million)  
Marcos2  
219  
Wood Ranch  
$29.5 million  
$29.2 million  
$27.8 million  
$34.6 million  
$33.4 million  
$36.2 million  
$39.4 million  
$38.4 million  
($3.9 million)  
($7 million)  
2220  
II  
Dove Canyon  
2221  
I
Dove Canyon  
($11.6 million)  
($3.8 million)  
2222  
II  
Chino Hills2223  
Development projects (in US$)  
Project  
Value of Castor’s  
collateral  
Loan balances  
owed to CHIO  
Surplus  
(deficiency)  
(per Vance)  
(low, mid-point  
and high)  
Rancho  
$13 million  
$20.1 million  
($7.1 million)  
California2  
224  
[
2031] Froese opined that the estimated security shortfall for the loans to the DT Smith  
entities, as at December 31, 1990, ranged from a low of CDN$48 million, to a mid-point  
2218  
2219  
2220  
2221  
2222  
2223  
2224  
PW-2908, vol. 3 pp.75 and following  
PW-2908, vol. 3 pp.65 and following  
PW-2908, vol. 3 pp.58 and following  
PW-2908, vol. 3 pp.68 and following  
PW-2908, vol. 3 pp.71 and following  
PW-2908, vol. 3 pp.61 and following  
PW-2941, vol.5, p.79  
500-05-001686-946  
PAGE: 412  
2
225  
The details are enunciated in the  
of CDN$56 million, to a high of CDN$63 million.  
following charts, but in US$:  
Construction projects (in US$)  
Project  
Total net sales  
Total costs no Castor’s  
financing costs included  
Minimum  
proceeds (per Froese)  
Surplus  
(
deficiency)  
Laguna I  
Not discussed by Froese  
Laguna II2226  
$32.7  
$27.1  
$39.3  
$36.2  
($6.6)  
($9.1)  
San  
Marcos2  
227  
Wood Ranch  
$27.9  
$28.1  
$28.1  
$34.2  
$33.7  
$34.1  
$36.7  
$37.4  
($5.8)  
($6.0)  
($8.6)  
($3.2)  
2228  
II  
Dove Canyon  
2229  
I
Dove Canyon  
2230  
II  
Chino Hills2231  
Development projects (in US$)  
2225  
2226  
2227  
2228  
2229  
2230  
2231  
PW-2941, vol. 5, pp. 58 and 100  
PW-2941, vol. 5 p. 97  
PW-2941, vol. 5, p. 89  
PW-2941, vol.5, p. 83  
PW-2941, vol. 5. p. 73  
PW-2941, vol.5, p. 78  
PW-2941, vol.5,  
500-05-001686-946  
PAGE: 413  
Project  
Value of Castor’s  
collateral  
Loan balances  
owed to CHIO  
Surplus (deficiency)  
low, mid-point and  
(
(
per Froese)  
high)  
Bonanza  
Homes  
Not discussed by Froese  
Circle "R"  
Ranch2  
Acquisition price July  
1989 $11.4 million (no  
appraisal)  
$13 134,540  
No final conclusion  
reached  
232  
Rancho  
Appraisal “as is” value  
$13 million  
$20,153,604  
$9,897,060  
10,242,269  
30,743,316  
$7.2  
California2  
233  
Rancho Parcel  
Appraisal “as is” value  
$9.8 million  
—-  
—-  
2234  
II  
Rancho Parcel Appraisal “as is” value $  
2235  
V
10 million  
Ritz Point2236  
Two appraisals  
$1.7, $3.2, $4.7  
“
as is”  
$
$
26  
29  
Santiago  
Ranch  
Not discussed by Froese  
$11,539,715  
Walker  
Basin2  
No appraisal  
No conclusion  
reached  
237  
[
2032] Froese’s loan loss provisions were predicated «on the assumption that CHIO  
would also place the loans secured by these projects on a non-accrual basis (no longer  
2232  
2233  
2234  
2235  
2236  
2237  
PW-2941, vol.5, pp. 121-123  
PW-2941, vol. 5, pp.110-113  
PW-2941, vol. 5, pp. 114-117  
PW-2941, vol.5, pp. 118-120  
PW-2941, vol.5, pp.104-109  
PW-2941, vol.5, pp. 124-125  
500-05-001686-946  
PAGE: 414  
recognizing capitalized interest as income), and disclosing the extent of non-performing  
2
238  
loans in the notes to the financial statements. »  
[
2033] To determine if a loan loss provision was necessary, Vance opined that each  
project had to be considered separately. Given the facts as they unfolded, Vance said  
that GAAP did not permit a loss on one project to be offset against the profit on another  
distinct project.2 C&L’s own internal materials are consistent with Vance’s opinion.2240  
239  
[
2034] Because of the unique circumstances of these DT Smith loans where there was  
common ownership and a common guarantor and a precedent for the application of a  
surplus, it was Froese’s view that it was arguable that surplus from one project could be  
2
241  
offset against the deficiency on another.  
[
2035] Both Vance and Froese opined that because the loans to the DT Smith  
Companies were impaired and clearly required massive write-downs in 1990, all the  
capitalized interest and fees in connection with such projects for 1990 should have been  
reversed.2 The required reversals of revenue for 1990 amounted to $16.5 million.  
2243  
242  
Good m a n  
[
2036] In his report, and based on the alleged values and ability to offset a deficiency on  
one DT Smith project against a surplus on another, Goodman opined that no additional  
2
244  
.
loan loss provisions were required under GAAP in respect of these loans  
[
2037] Based on the figures reproduced in the following charts, Goodman concluded  
that there was a surplus of US$9.3 million on the construction projects and a surplus of  
US$17.5 million on the development projects:  
Construction projects (in US$)  
2238  
2239  
2240  
2241  
2242  
2243  
2244  
PW-2941, Vol. 5, p. 58.  
Vance, April 12, 2010, pp. 255-256.  
PW-1420, Tab 33.  
PW-2941, Vol. 5, pp. 3-4.  
PW-2941, Vol. 5, p. 7.  
PW-1485-2-90-2.  
D-1312, p. ES-30.  
500-05-001686-946  
PAGE: 415  
Project  
Value of Castor’s  
collateral  
Loan balances owed to  
CHIO  
Surplus  
(deficiency)  
(
per Goodman)  
$1.8  
Laguna I  
Laguna II  
$1.6  
$0.2  
-
$18.8  
$18.8  
$17.5  
$16.2  
$16.2  
$20.6  
$17.5  
San Marcos  
Wood Ranch II  
Dove Canyon I  
Dove Canyon II  
Chino Hills  
$16.7  
($0.8)  
$1.5  
$1.9  
$2.4  
$4  
$17.7  
$18.1  
$23.0  
$21.5  
Development projects (in US$)  
Project  
Value of Castor’s  
collateral  
Loan balances owed to  
CHIO  
Surplus  
(deficiency)  
(
per Goodman)  
Bonanza Homes  
$1  
$1  
-
Circle "R"  
Ranch  
$14.7  
$13.1  
$1.6  
Rancho  
$23.4  
$20.2  
$3.2  
California  
Rancho Parcel II  
$9.4  
$9.9  
$9.9  
($0.5)  
($0.3)  
Rancho Parcel  
V
$10.2  
Ritz Point  
Santiago Ranch  
Walker Basin  
$32.6  
$14.6  
$11.8  
$30.7  
$12.6  
$11.5  
$1.9  
$2.0  
$0.3  
Differ en ces bet ween exp er t s  
500-05-001686-946  
PAGE: 416  
[
2038] The difference in value attributed to the remaining unsold units in various  
projects significantly explains the differences between the value of Castor’s collateral  
security determined by Goodman and those determined by Vance or Froese.  
[
2039] The following chart illustrates some of those differences, in US$:  
Project  
Average as at  
December 31,  
Vance’s  
figures  
Froese’s  
figures  
Goodman’s  
figures  
1
990  
(per unit)  
(adjusted auction  
pricing and per unit)  
(net proceeds and per  
unit)  
(
per unit and  
including auction  
pricing)  
Chino Hills  
Dove Canyon 1  
Dove Canyon II  
Wood Ranch II  
San Marcos  
$273,1112245  
$272,7962249  
$233,0592253  
$197,1292257  
$227,4442261  
$311,5812265  
$255,0002246  
$252,0002250  
$263,0002254  
$189,0002258  
$227,0002262  
$306,0002266  
$254,5142247  
$247,4642251  
$278,0262255  
$178,9552259  
$209,7892263  
$293,0002267  
$287,0002248  
$289,0002252  
$345,0002256  
$217,0002260  
$298,0002264  
$351,0002268  
Laguna II  
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
245  
PW-2941, vol. 5, p.64  
246  
247  
248  
249  
250  
251  
252  
253  
254  
255  
256  
257  
258  
259  
260  
261  
262  
263  
264  
PW-2908, vol. 3, pp. 61-62  
PW-2941, vol. 5, p.64; D-1312, p.632 (auction pricing at $242,000 net)  
D-1312, p. 632 ( average calculated as follows : net proceeds of $29,568 divided by 103 units), p.684  
PW-2941, vol. 5, p.73  
PW-2908, vol.3, pp.68-69  
PW-2941. Vol.5, p.73  
D-1312, p.678  
PW-2941. Vol.5, p.78  
PW-2908, vol. 3, pp.71-72  
PW-2941. Vol.5, p.75-76  
D-1312, p.681  
PW-2941. Vol.5, p.83  
PW-2908, vol. 3 pp. 58-59  
PW-2941. Vol.5, p.83  
D-1312, p. 675, 700  
PW-2941, vol 5. p.89  
PW-2908, vol. 3, pp.65-66  
PW-2941, vol 5. p.89  
D-1312, p.600 and 604 ( average calculated as follows : net proceeds of $19,694 divided by 66 units),  
p.672  
2265  
2266  
2267  
2268  
PW-2941, vol.5, p.97  
PW-2908, vol. 3 p.78  
PW-2941, vol.5, p.97  
D-1312, p.669  
500-05-001686-946  
PAGE: 417  
[
2040] Had Goodman used figures closer to the ones proposed by Vance and Froese,  
Goodman would have found also that Castor had to take a significant (material) LLP in  
990.  
1
[
2041] Another difference between the conclusions of Vance, Froese and Goodman  
relates to the inclusion, or exclusion of future interest payable to Castor during the  
period of completion of the DT Smith projects, in the calculation of the costs to  
complete.  
•
Vance includes future interest income on the basis that it forms part of the costs  
to complete the projects, as shown on the cash flow projections.  
•
Froese concludes that: « it is appropriate for the best estimate of the probable  
loss related to the D.T. Smith loans to include, at a minimum, future interest  
2
269  
payable by Castor on its loan to BVAG and BHF Bank.»  
•
In his 2008 report, Goodman acknowledges that he used the same methodology  
2
270  
By reversing his opinion from his  
as Vance and Froese for his 1998 report.  
1
998 report, to his 2008 report, and eliminating future interest income from the  
cost to complete the DT Smith projects, and eliminating future interest income  
from the cost to complete the DT Smith projects, Goodman has increased his  
2
271  
best estimates of value by approximately $16 million.  
Conclusions  
[2042] The real estate market conditions in California were deteriorating.  
[
2043] As at December 31, 1990 (more than two months after the last of the auctions),  
the prices achieved at the auctions of the construction projects reflected the then  
current market conditions, a fact that Strassberg (DT Smith’s auditor) recognized and  
acknowledged.  
[
2044] It would not have been reasonable under GAAP for an auditor to accept  
Goodman’s suggested average net proceeds per unit for the construction projects.  
[
2045] Taking into account the content of the available appraisals and the testimony of  
Ron Smith relating to the state of those projects, it would not have been reasonable  
either under GAAP to value the Rancho California project at $23.4 million and the Ritz  
Pointe project at $32.6 million, as Goodman did.  
•
The value of $13 million had to be used for Rancho California.  
2269  
2270  
2271  
PW-2941, Vol. 5, p.7.  
998 Report of R. Goodman, p. 574.  
D-1312, p. 658  
1
500-05-001686-946  
PAGE: 418  
•
The value of $26 million was applicable to Ritz Pointe.  
[
2046] Had Goodman used these figures, he might have had a deficiency instead of a  
US$17.5 million surplus for the development projects.  
[2047] Plaintiff expert’s opinions prevail.  
•
•
Castor should have taken a huge LLP (at least CDN$40 to $50 million).  
Future interest payable had to be included in the computation, at least up to  
the amounts that Castor would have had to pay to its own lenders, as  
suggested and calculated by Froese.  
500-05-001686-946  
PAGE: 419  
Diversion of fees (1988, 1989 and 1990)  
[
2048] Above and beyond the previous detailed reasons, the consolidated audited  
financial statements of Castor for 1988, 1989 and 1990 were also materially misstated  
as a result of a diversion of fees.  
Positions (in a nutshell)  
Plaintiff  
[
2049] Plaintiff alleges that $15.1 million of commissions or fees payable to CHIO were  
diverted to Stolzenberg, David Smith, and Gambazzi’s and Bänzinger’s related  
corporations, during 1988, 1989 and 1990.  
[
2050] Plaintiff argues that had C&L performed their audits in accordance with GAAS,  
they would have discovered the situation and questioned the good faith of management.  
[
2051] Plaintiff mentions that no evidence establishes that there would have been a fee  
sharing arrangement; to the contrary, the evidence indicates that the fees were diverted  
from CHIO.  
[
2052] Therefore, Plaintiff concludes that the consolidated audited financial statements  
of Castor for 1988, 1989 and 1990 are materially misstated.  
Defendants  
[
2053] Defendants allege that the issue of the “diversion” of the DT Smith fees raises at  
least four questions:  
•
First, was there a fraudulent diversion of fees or were the amounts that were  
transferred to Stolzenberg, David Smith and to different entities, which may or  
may not have been related to Gambazzi and Bänziger, a fee sharing  
arrangement?  
•
•
•
Second, was the audit of these fees a completeness of revenue test as  
suggested by Plaintiffs or a cut off test as suggested by Defendants?  
Third, should the “diversion” of these fees have been detected by ordinary  
GAAS?  
Fourth, were the financial statements misstated by the non-inclusion of these  
fees in income?  
500-05-001686-946  
PAGE: 420  
[
2054] To the first question, Defendants answer that the evidence is not clear but if the  
Court comes to the conclusion that cash payments were made to Stolzenberg, David  
Smith and the various entities, and that these payments were kicked back from the DT  
Smith fees, then this was a fraud on C&L.  
[
2055] To the second question, Defendants answer that the audit of these fees was a  
cut off test, not a completeness of revenue test.  
[
2056] To the third question, Defendants answer no, since none of the tracings that  
were required for Plaintiffs’ experts to identify the fee diversion is ordinary GAAS.  
[
2057] To the fourth question, Defendants answer that there is no evidence in the record  
that the financial statements were misstated. To support their answer, they rely on the  
following extract of the testimony of Selman:  
A- So the whole thing is just this huge amount of transactions whi.ch are not very  
clearly identified and out of which Mr. Vance has picked out the CHIO fees and  
said those went to Stolzenberg and Smith. And I just don't think that the evidence  
is that clear. So there are many conflicting possibilities and it's difficult to support  
Mr. Vance's conclusion that they all started with monies that CHIO transferred to  
CH Cyprus.  
Q- Okay. Mr. Selman, assuming the Court concludes that Mr. Vance's  
explanations are more likely explanations, how would that have changed the  
accounting treatment for the payments to Mr. Stolzenberg?  
A- Well, I describe Mr. Vance's view in 6.13.12 of my report. From a perspective  
of the accounting, as I said I don't think it could be said with assurance that the  
fees were intended to belong to CHIO and therefore it may not have been correct  
to characterize the onward transfers as Mr. Vance says as CHIO expenses. But  
even if the transfers were accounted for that way, this would not change the net  
financial result from that which was reported. There would be simply more  
revenue and a fully offsetting expense.  
500-05-001686-946  
PAGE: 421  
The materiality of them wouldn't be very consequential in their net result because  
there would be essentially a wash.  
I do agree that if the transactions were advances that were intended to be  
repayable and therefore would have been appropriately recorded as an asset in  
the first instance, there would be a need to determine whether they could have  
been collected. In other words, if the monies belonged to CHIO, CHIO should  
have shown more revenue, but it would have had to then report either an  
expense representing the transfers to Mr. Stolzenberg and Mr. Smith which  
would wash out that portion of the revenue that wasn't being retained by it or it  
would have had to say in its accounts: "These monies were taken by Mr.  
Stolzenberg and Mr. Smith. They belong to us to go on our balance sheet as an  
asset".  
Now, are they collectible from Stolzenberg and Smith?  
Now, no question that in recording them as an advance in that manner, they're  
recording them as something which they didn't agree to presumably on Mr.  
Vance's construction of the situation. But nonetheless, from an accounting  
standpoint, they would amounts owing to CHIO and they would have to be set up  
in the accounts in that manner.  
And then the question would have to be dealt with.  
Now, obviously, this bypasses the entire question of what would have occurred if  
it would come to the attention of the auditors that there were these amounts and  
the amounts belong to OHIO and were being in effect. . . there was in effect a  
defalcation or a theft of them.  
So, in summary, I'm saying that I've looked at in all and I cannot give you a firm  
conclusion that the CHIO fees were in fact a theft by Mr. Stolzenberg and Mr.  
Smith from CHIO or that you can in fact trace, through the "Various" account, the  
monies coming from CHIO into the "Various" account as going out to Mr.  
Stolzenberg and Mr. Smith because the evidence that you have just doesn't  
permit that kind of conclusion.  
500-05-001686-946  
PAGE: 422  
And Mr. Vance - and we'll see the reaction of the other experts - but Mr. Vance  
has agreed that he cannot exclude the possibility that this was essentially a fraud  
in the United States Treasury and that this was an artificial way of Stolzenberg  
and Smith taking money out of the D.T. Smith Group of companies.2  
272  
Evidence  
2058] The loan documentation evidencing the agreements entered into between CHIO  
[
and the DT Smith entities refer to very substantial placement and renewal fees payable  
2
273  
by the DT Smith companies to CHIO.  
2059] All placement and renewal fee revenue was to be paid to CHIO 2274– there is no  
[
reference that such revenue was to be shared with any other entity or individual.  
[
2060] CHIO was funding 100% of all costs, fees and expenses relating to the DT Smith  
projects. Thus, CHIO was also funding the placement and renewal fees that it was  
charging to the DT Smith companies.  
[
2061] Each time CHIO would advance funds to the DT Smith companies, a portion of  
2275  
the advance would include the placement fee.  
[
2062] For 1988, 1989 and 1990, a total of US$27.9 million was collected by CHIO as  
fees generated from its loans to the DT Smith companies. Of that amount, only US$12.9  
million was recognized as revenue by CHIO: the balance, namely US$15.1 million, was  
2
276  
and was ultimately transferred to  
not recognized as income by any Castor company  
2
277  
CHIF’s “Various US” current account.  
2
272  
273  
Selman, May 22, 2009, pp.47-49  
PW-1114 to PW-1123; See, for example, re- Dove Canyon II : PW-1114-1; PW-1114-2B; PW-1114-  
2
3B; PW-1114-12B.  
2
274  
275  
Gourdeau, January 29, 2008, pp.77 and following; PW-1114 to PW-1123  
See, for example, PW-1114-4, with respect to Dove II, where CHIO’s advance of $7,860,825.54 on  
June 2, 1988 included an amount of $2 million as “placement fees to be sent back to C.H. Overseas”.  
Gourdeau, January 29, 2008, pp.79 and following.  
2
2
276  
277  
PW-2893-132; D-1347, p.120. These amounts match, exactly, the amounts set out in PW-2893-132,  
within PW-2908, Vol. 1, pp. 6-47, 6-56, 6-57, 6-59. See also Gourdeau, January 29, 2008, pp. 77 and  
following; Gourdeau, February 25, 2008, pp.162-163  
2
PW-2893-132.  
500-05-001686-946  
PAGE: 423  
[
2063] Those amounts are more fully described in the following three exhibits of Vance’s  
2278  
entitled “Analysis of fee revenue from D.T. Smith Projects” :  
report  
Year end December 31, 1988  
2278  
PW-2908, vol. 1, pages 6-57, 6-58 and 6-59  
500-05-001686-946  
PAGE: 424  
Year end December 31, 1989  
500-05-001686-946  
PAGE: 425  
Year end December 31, 1990  
[
2064] Entries in Castor’s books and records clearly show that the amounts transferred  
from CHIO by inter-company transactions to CHIF’s “Various US” current account  
represent a portion of the placement fees from CHIO’s loans to the DT Smith  
companies.2  
279  
[
2065] From CHIF’s “Various US” current account, a number of cash payments were  
made to Stolzenberg personally (totalling US$4,741,168), David Smith personally  
(
totalling US$1,141,502). There were as well as transfers or credits to the account of  
Interglob (totalling US$6,629,787), and to Fianico/ c/o Marco Gambazzi (totalling  
US$2,832,906).2  
280  
[
2066] Additional supporting documents, such as bank statements, telexes and payment  
vouchers, are proof of the diversion of a significant portion of the fee income of the DT  
Smith companies. 2  
281  
[
2067] The entries recording the transfers from CHIO to CH Cyprus, and thence to  
CHIF’s “Various US” current account, make it clear that the amounts being transferred  
2279  
2280  
2281  
See PW-2893-132.  
PW-2908, Vol. 1, pp. 6-60, 6-61, 6-62 and 6-63.  
PW-1776; PW-1777; PW-1780 (OSR #248 dismissed); PW-1781; PW-1782.  
500-05-001686-946  
PAGE: 426  
2
282  
Indeed, the entries relating to  
were placement fees relating to the DT Smith projects.  
these transfers specifically refer to the transfer of placement fees, and name the specific  
DT Smith project.2  
283  
[
2068] C&L Cyprus were preparing statutory financial statements for the Cyprus entities  
of Castor, namely CHIO.  
[
2069] Each year, C&L Cyprus wrote to C&L asking them to perform various procedures  
or to confirm the results thereof.  
•
•
In relation to C&L’s 1988 audit, C&L Cyprus wrote on January 16, 1989 and C&L  
answered on March 1, 1989. In her answer, Ford mentioned the following at item  
#
5 “Reviewed loan (receivable/payable) documentation on a test basis. Sample  
2284  
included all new loans receivable entered into in the year”.  
In relation to C&L 1989 audit, C&L Cyprus wrote on January 29, 19902285. C&L  
Cyprus namely asked as their demand # 4 “for commissions (received/payable)  
agree details and amounts to relevant documentation” and as their demand # 6  
“
for all loans (given/obtained) agree terms to the relevant documentation”. On  
2286  
February 12, 1990, C&L answered . In her answer, Ford mentioned the  
following in relation to item # 4 “On a test basis, agreed details of commissions  
(
received/payable) to supporting documentation” and the following in relation to  
item # 6 “Reviewed loan (receivable/payable) documentation on a test basis.  
2
287  
.
Sample included all new loans receivable entered into in the year”  
•
In relation to the C&L 1990 audit, C&L Cyprus wrote on August 2, 1991, making  
2288  
the same demands as the one made the previous year . The audit working  
papers include information that C&L would have sent them on February 5, 1991,  
i.e. in relation to item # 4 “On a test basis, agreed details of commissions  
(
received/payable) to supporting documentation” and the following in relation to  
item # 6 “Reviewed loan (receivable/payable) documentation on a test basis.  
2
289  
Sample included all new loans receivable entered into in the year.”  
2
282  
283  
PW-2908, Vol. 1, pp. 6-45, 6-46.  
2
See, for example, PW-145A, Vol. 2, bates #055884, entries recorded on August 31, 1989 relating to  
Circle R. Ranch, Rancho Parcel 2 and Rancho Parcel 5, and PW-145A, Vol. 2, bates #055883,  
entries recorded on May 31, 1989, relating to Walker Basin.  
PW-1053-84, sequential pages 11-12  
2284  
2285  
2286  
2287  
2288  
2289  
PW-1053-83, sequential pages 62-65  
PW-1053-83, sequential pages 53-54  
PW-1053-83, sequential pages 53-54  
PW-1053-81, sequential pages 33-36  
PW-1053-81, sequential pages 51-52  
500-05-001686-946  
PAGE: 427  
[
2070] On September 5, 1996, at discovery, concerning the work she would have done  
at the request of C&L Cyprus in relation to commissions and fees payable to CHIO,  
Ford testified as follows:  
On a test basis agreed details of commissions, in brackets “receivable/payable”  
2291  
it would have been something that I did.  
2290  
to supporting documentation".  
2292  
That is the work that I performed while I was on site.  
Q- And you say that you agreed the commissions?  
A On a test basis, yes.2293  
My recollection of what I did in 1989, was that when I was reviewing the loan files  
the information would have been available to me at the time to ensure if it there  
was a commission due or payable or receivable, and I would have, on a test  
2294  
basis, looked at those.  
Q-Apart from the fact that you represent in the letter that, you did, is there any  
evidence of what work you did?  
A- No, Sir.2295  
I verified to documents but not to cash receipts.2  
296  
I do not recall doing it for  
those – for commissions, Sir. I know I recall doing it for interest. Though I may  
2297  
have.  
[
2071] On December 8, 2009, thirteen years later, Ford testified at trial that she only did  
a cut-off test, not a completeness test. She alleged not to have been required to perform  
a completeness test.2  
298  
[
2072] In December 1989, February 1990 and June 1990, during their preparation of  
their stand-alone 1988 financial statements, C&L Cyprus sent telexes to Bänziger  
requiring an explanation as to why the commission income (placement fees) earned  
2
299  
.
were different from the amounts recorded in the records of CHIO  
2290  
2291  
2292  
2293  
2294  
2295  
2296  
2297  
2298  
2299  
Ford, September 5, 1996, p.94  
Ford, September 5, 1996, pp.94-95  
Ford, September 5, 1996, p. 95  
Ford, September 5, 1996, pp. 95-96  
Ford, September 5, 1996, p.96  
Ford, September 5, 1996, p.96  
Ford, September 5, 1996, p.102  
Ford, September 5, 1996, p.102  
Ford, December 8, 2009, pp.30-52  
PW-1530-1A; PW-1530-1B  
500-05-001686-946  
PAGE: 428  
[2073] On June 22, 1990, Bänziger sent the following answer to C&L Cyprus:  
Commissions  
We cannot comment as to the discrepancies between information you had from  
loan documents to amounts received. It happened from time to time that  
commission agreements are changed subsequent to the first negotiation,  
depending upon the specific situation.”2  
300  
[
2074] David Smith admitted having received part of the fees that his companies had to  
pay to CHIO according to the loan agreements, as follows:  
“
Q. I certainly will ask you, Mr. Smith, it’s marked in favour of D. Smith. The D.  
Smith there is who?  
A. Me.  
Q. And did you maintain a personal account in London at that account number?  
A. Yes.  
Q. What was the reason for the payment?  
A. According to an agreement I had with Mr. Stolzenberg, he agreed to return a  
portion of the placement and/or extension fees to me.  
Q. To you personally?  
A. Yes.  
Q. And this is how it was paid and when it was paid?  
A. Yes.”2301  
[
2075] Gourdeau, Castor’s Trustee in bankruptcy, thought at first that the inter-corporate  
2
302  
but he  
transfers between CHIO and CHIFNV were done in order to save taxes,  
traced the flow of funds through the various Castor accounting records and uncovered  
the transfers to Stolzenberg and David Smith.  
2300  
2301  
2302  
PW-1530  
David Smith, March 14, 2000, p. 208  
Gourdeau, January 29, 2008, pp. 147-148  
500-05-001686-946  
PAGE: 429  
Experts’ evidence  
Vance  
[
2076] Vance testified that some completeness test on the revenue was done by the  
Montreal audit team, for CHL, but that none was done by the overseas audit team for  
2
303  
CHIO.  
[
2077] Vance mentioned that the largest source of placement fees for Castor was the  
DT Smith Group, and that CHIO was its receiver according to the loan documentation.  
[
2078] Vance opined that it would have been easy to do a completeness test on the  
2304  
.
fees owed to CHIO, and that it was required to audit in accordance with GAAS  
Vance added that the diversion of fees would have been obvious, if it had been  
2
305  
done.  
[
2079] Vance described the test that should have been performed as follows: “the test is  
to look at what the revenue should be from the documents, the loan documents,  
particularly for placement fees, and then to track that revenue and see that it is actually  
collected”.2  
306  
[
2080] Vance opined that the completeness test was “not forensic accounting by any  
2307  
way, shape or form, it's just standard auditing and following the audit trail”.  
[
2081] Vance noted that “The diversion of fees started in nineteen eighty-eight (1988),  
eighty-nine ('89) and ninety ('90), and the money was paid out to diverted in effect, and  
the balance at the end of ninety ('90) arrived at exactly the same amount to the penny  
2
308  
that it was in nineteen eighty-seven (1987)”.  
[
2082] Vance confirmed that he had effectively verified all the entries in Castor’s books  
2309  
and records pertaining to the diversion of fees.  
[
2083] Vance opined that “The proper accounting treatment to disclose what had taken  
place would have been to either record the full amount of the fee revenue and then  
record, as a properly described expense, the payments to the other parties while also  
disclosing as related party transactions the payments to Wolfgang Stolzenberg”. He  
however proposed that an alternative treatment could have been “to record the full fee  
revenue and then record the payments and transfers of credits as receivable from the  
2
2
2
303  
304  
305  
Vance, April 7, 2008, pp.94-99  
Vance, April 7, 2008, pp.93 and following  
Vance, March 13, 2008, pp.204-207; Vance, April 7, 2008, pp.99 and following; Vance, May 12, 2008,  
pp.60 -62; Vance, June 12, 2008, pp.86-121  
2306  
2307  
2308  
2309  
Vance, March 13, 2008, p.204  
Vance, March 13, 2008, p.206; Vance, April 16, 2008, pp.91-93; Vance, June 12, 2008, pp.95-96  
Vance, March 13, 2008, p. 205  
Vance, April 7, 2008, p.101  
500-05-001686-946  
PAGE: 430  
recipients. The likelihood of ever collecting these amounts would then have to be taken  
into consideration. If collection was doubtful, a provision for loss would have to be  
recorded, in which case, the net result would be the same as if the payments and  
transfers of credits were directly recorded as expenses. The receivables from Mr.  
2
310  
Stolzenberg (…) would be shown as receivables from related parties”.  
[
2084] Vance retained that the amount of the misstatements represented by the  
understatements of revenue for 1988, 1989 and 1990 far exceeded the preliminary  
materiality assessments established by C&L and using C&L preliminary assessments of  
2
311  
materiality, he concluded that the financial statements were materially misstated.  
[
2085] Vance concluded that “Had C&L performed the appropriate audit procedures,  
they would have been obliged to raise questions regarding the possibility of collusion  
between management and a significant borrower, the failure to disclose related party  
transactions, and Castor being deprived of a material amount of revenue. These issues  
would also have served as “red flags” to the auditors to conduct additional audit  
procedures to determine whether there were similar issues in other areas of their audit  
2
312  
and to question the integrity of management.”.  
2086] During his cross-examination, Vance explained that the auditors were not  
[
defrauded, even if the diversion of fees was or could be a misappropriation of the  
company’s funds2 since nothing was concealed from them  
2314  
.
313  
[
2087] During his cross-examination, Vance acknowledged that the diversion of fees  
would have no impact on the income statement of the financial statements, as follows:  
the net effect on the income statement is zero because if you have... the accounting  
“
treatment when you come across misappropriation is you could either record it and set  
up the revenue, set up a receivable from the recipient, and then you would have to write  
off that receivable as being unlikely of being collected, so the impact on the income  
2
315  
statement is nil in the balance sheet.”  
Froese  
[
2088] Froese asserted that Ford was requested by C&L Cyprus, who were performing  
a stand-alone audit of CHIO, to perform a test which, if done correctly, should or would  
2
316  
have allowed her to detect the diversion of fees.  
2310  
2311  
2312  
2313  
2314  
2315  
2316  
PW-2908, volume 1, p. 6-49  
PW-2908, volume 1, p. 6-50  
PW-2908, volume 1, p. 6-56  
Vance, June 12, 2008, pp.87-94  
Vance, May 12, 2008, pp.32-36  
Vance, June 12, 2008, p.97  
PW-2941, vol.5, pp. 190 and following; Froese, December 2, 2008, pp.123-127; Froese, December 8,  
008, pp. 184 and following;  
2
500-05-001686-946  
PAGE: 431  
[
2089] During his cross-examination, Froese acknowledged that it was possible to read  
2317  
but he nevertheless  
the procedure to be performed by Ford as a cut-off test,  
2
318  
maintained that Ford had to look at the loan agreements.  
[
2090] During same cross-examination, after having reviewed Ford’s testimony on  
discovery and acknowledged that it was confusing to some extent, Froese reiterated  
that Ford “ did some on a test basis, in which case she either got it wrong, she got it  
wrong each time, or she didn't do the work at all, in which case it should have been  
2
319  
.
done”  
[
2091] Froese admitted that, to comply with GAAS, C&L needed not “to trace the  
commission income through all the books and records of Castor unless there was  
2
320  
something that would raise their suspicion”.  
Selman  
[
2092] Selman agreed that the «recognition of fee income on the David T. Smith Group  
st nd  
loans» is set out in the 1 and 2 mortgages, entered into between CHIO and the DT  
st  
nd  
Smith entity, and he cited, as an example, the 1 and 2 mortgage loan agreements  
relating to the Dove I project.2  
321  
[
2093] Selman explained that a balance sheet approach audit would not require tests  
like those suggested by Plaintiff’s experts on the completeness of revenue or the sub-  
ledgers. Selman added that to detect the fee diversion, an auditor would have to design  
2
322  
an audit with a forensic component.  
[
2094] Selman agreed that Castor’s books traced the transfers of this fee income and  
2323  
stated that there was no attempt to conceal this process.  
[
2095] Selman acknowledged that “if the payments had come to the auditors' attention,  
2324  
they needed explanations, there's absolutely no question about that.”  
2317  
2318  
2319  
2320  
2321  
2322  
2323  
2324  
Froese, December 10, 2008, pp.119-120 and pp. 126-132  
Froese, December 10, 2008, p.121  
Froese, December 10, 2008, pp.126-131  
Froese, December 10, 2008, pp.113-114  
D-1295, p. 345, paragraphs 6.13.04 & 6.13.05.  
Selman, May 22, 2009, pp. 54-60  
D-1295, pp. 345, 351, paragraphs. 6.13.02. and 6.13.14.  
Selman, May 22, 2009, p. 55  
500-05-001686-946  
PAGE: 432  
[
2096] Selman emphasized that the payments to David Smith were not concealed,  
which suggested to him that there was a viable explanation.  
I want to emphasize the fact that the payments were not concealed, .they're not  
clearly linked to the placement fees when you look at the "Various" account, that  
they were not concealed. I can pick up the "Various" account, go down the  
"
"
Various" account and see the payments to D.T. Smith... to David Smith in the  
Various" account, okay.  
So that suggests to me that there was a viable explanation. Otherwise, if there  
wasn't a viable explanation, these were not unsophisticated people; that we can  
see is obvious.  
If there wasn't a viable explanation for this, it has to evident that they would have  
concealed the payments to David Smith by not writing a cheque to him from  
CHIFNV, but by sending the money to some other shell company somewhere  
through Dr. Marco Gambazzi's companies somewhere or something to that order  
and then disbursing it back to him out of there. There was no attempt to conceal  
the payments to David Smith... there was no attempt to conceal the payments to  
Wolfgang Stolzenberg rather.  
So you have to ask yourself why would they... these organizations who we've  
seen were so clever at concealing things, have simply left those payments there  
2325  
opened in the books.  
[
2097] Selman added that if CHIO was merely a conduit and if no money was, in fact,  
owed to CHIO that “an explanation would have been desirable since CHIO was being  
2
326  
used then in an unusual and very unconventional manner and in a substantial way”.  
[
2098] Selman opined that he was not expecting C&L to devote a lot of time looking at  
2327  
He mentioned that “the balances at the end of the year were  
the various accounts.  
not very large although, in some years, they were above the technical materiality  
limit.”2  
328  
Levi  
[
2099] Levi explained that the purpose of the test that Ford would have performed was a  
2329  
cut-off test of the receivables and payables.  
[
2100] Levi considered and opined that such transfers were concealed.2330  
2325  
2326  
2327  
2328  
2329  
Selman, May 22, 2009, p.56  
Selman, May 22, 2009, p.57  
Selman, May 22, 2009, p. 58  
Selman, May 22, 2009, p.60  
Levi, January 12, 2010, pp. 236-237  
500-05-001686-946  
PAGE: 433  
Conclusions  
[2101] A test of completeness on CHIO’s placement fee income was required.  
[
2102] Had C&L performed this test, they would have determined that a significant  
portion of the fee revenue had been diverted to other parties. Such tests of  
completeness were performed at the Castor Montreal and CHIF level, but not for  
2
331  
CHIO.  
[
2103] Selman’s position is that C&L performed a “balance sheet audit”. According to  
Selman, C&L was not testing the completeness of Castor’s revenue. He concedes that  
2
332  
there was no testing of CHIO’s revenue, be it for “cut-off”, or for any other purpose.  
Vance disagrees that C&L were performing a “balance sheet audit”, which he states:  
2
333  
2334  
and he refers to an extract from Meigs.  
«
…disappeared in Canada in 1951…-»  
[
2104] For 1988, the total fees charged by CHIO on the DT Smith loans amounted to  
2335  
US$10.8 million, representing more than 50% of Castor’s consolidated net earnings,  
2
336  
and 70% of CHIO’s net earnings.  
[
2105] For 1989, the fees charged to the DT Smith companies totalled US$9.8 million,  
2337  
and  
representing approximately 40% of Castor’s consolidated net earnings  
2
338  
approximately 50% of CHIO’s net earnings.  
[
2106] For 1990, the fees charged to the DT Smith companies totalled US$7.3 million,  
2339  
and 35% of  
representing approximately 25% of Castor’s consolidated net earnings,  
CHIO’s net earnings.2  
340  
[
2107] For all three years, C&L had no written audit program setting out the procedures  
2341  
The only reference to a test of  
for testing CHIO’s “commissions earned” account.  
CHIO’s commission income is Ford’s correspondence with C&L Cyprus.  
2330  
2331  
2332  
2333  
2334  
2335  
2336  
2337  
2338  
2339  
2340  
2341  
D-1347, p. 236.  
PW-2908, Vol. 1, pp. 6-50 to 6-53.  
D-1295, p. 355, paragraphs. 6.13.21 and 6.13.22.  
Vance, April 15, 2010, p. 100.  
PW-3053-3.  
PW-5, Tab 10.  
PW-1053-84, seq. p. 4.  
PW-5, Tab 11.  
PW-1053-83, seq. p. 16.  
PW-5, Tab 12.  
PW-1053-81, seq. p. 5.  
Martin, August 28, 1996, pp. 136-140.  
500-05-001686-946  
PAGE: 434  
[
2108] For the 1989 audit, C&L Cyprus, which was responsible for the Cyprus statutory  
audit of Castor’s Cyprus subsidiaries, wrote to her concerning the «audit work required  
2
342  
for year ended December 31, 1989».  
Item #4 reads: «For commissions  
(
receivable/payable) agree details and amounts to relevant documentation.» Ford  
replied to C&L Cyprus, confirming that she had performed the work requested, on a test  
basis, adding, at the point #6: «The sample of loans reviewed included all new loans  
2
343  
receivable entered into in the year».  
[
2109] In fact, for year-end 1989, there is no reference to her tracing the commission  
2344  
Thus, five out of the seven loans, for  
earned on such new loans to loan agreements.  
which the fees were diverted, were new loans in 1989, and were part of Ford’s sample  
for review. Froese opined that had Ford performed the required procedures, such  
2
345  
diversion would have been discovered, and the Court agrees.  
[
2110] C&L Cyprus did test the “commission earned” account for 1988, and noted that  
there was a discrepancy between the amount of commissions earned according to the  
loan documents, and the commissions earned as per the financial statements. They  
wrote to E. Bänziger for an explanation, referencing to the following four projects: Dove  
2
346  
Canyon I, Dove Canyon II, Tennis Court Villas and Laguna I.  
•
•
•
The Dove I and Dove II and Tennis Court I projects were part of the sample that  
2347  
Ford purportedly reviewed in 1988. If, in fact, she did review these three  
loans, she did not notice any discrepancy between commissions earned, as per  
the loan agreements, and commissions earned, as per the financial statements.  
There is absolutely no evidence, written or testimonial, and certainly nothing in  
C&L’s audit working papers, to support Bänziger’s reply to C&L Cyprus to the  
effect that «from time to time, commission agreements are changed, subsequent  
to the first negotiation …».  
C&L Cyprus never advised C&L Montreal of the discrepancies that they noted.  
2342  
2343  
2344  
2345  
2346  
2347  
PW-1053-83, seq. pp. 62-64.  
PW-1053-83, seq. pp. 41-42  
PW-1053-83, seq. pp. 103, 112, 113, 116, 119, 121, 123.  
PW-2941, Vol. 5, p. 184, para. 11.3.  
PW-1530B.  
PW-1053-84, seq. pp. 89, 92.  
500-05-001686-946  
PAGE: 435  
[
2111] Selman was specifically asked by the Court if Ford would have seen the two  
pages of the Konto Kurrents (“KK”) showing the payments coming out of the various  
account to both Stolzenberg and DT Smith, assuming she had performed procedure #3  
set out on the working paper PW-1053-87 at sequential page 107. Selman replied: «If  
2
348  
she checked all the KKs in CHIF NV, yes».  
[
2112] The payments to Stolzenberg were related party transactions. As payments out  
of CHIO’s assets, they should have been disclosed as RPTs: Vance and Selman  
2
349  
agree.  
[2113] The Court agrees with the following propositions:  
•
•
•
A proposition of Selman: the transfer of the placement fees from CHIO to CHIF’s  
2350  
various account was clear.  
A proposition of Froese: had «C&L appropriately audited CHIO’s fee revenue,  
2
351  
they would have had the opportunity to detect the diverted fees.»  
A proposition of Vance: this diversion of placement fees constituted a fraud  
against the company, but not against C&L, as the audit trail was not  
concealed.2  
352  
2348  
2349  
2350  
2351  
2352  
Selman, June 8, 2009, p. 156.  
PW-2908, Vol. 1, p. 6-54; D-1295, p. 350, para. 6.13.13.  
D-1295, p. 345, para. 6.13.02  
PW-2941, Vol. 1, p. 32.  
PW-2908, Vol. 1, p. 2-12.  
500-05-001686-946  
PAGE: 436  
I nformation conveyed by Castor’s audited consolidated financial statements of 1988, 1989 and 1990  
[
2114] Paul Lowenstein (“Lowenstein”), a Plaintiff’s expert witness who testified on the  
issue of due diligence and reliance, pointed out that audited financial statements give a  
reader an accurate portrait of the financial status of a company as at the date of the  
statements and as at the same date the previous year, when the statements are  
2
353  
.
comparative (such as those of Castor)  
[
2115] In a private company, Lowenstein explained that independent audit verification  
and comparative audited financial statements enable a reader to compare the trend of  
the company, the company's operating results and financial position over a period of  
time, and to understand the accounting policies that were used in preparing those  
financial statements.  
[
2116] Through the notes attached to the financial statements, Lowenstein added that  
the reader gets to know whether there are any outstanding and important qualifications  
or items that would be of importance beyond what normally appears in financial  
statements2  
354  
.
Highlights (1988)  
2117] Lowenstein described the highlights the 1988 audited consolidated financial  
[
statements of Castor as follows:  
•
•
The auditor’s report is an unqualified report.  
The 1988 results are most impressive: in every important category for a company  
of Castor’s nature there had been a significant growth, both on the revenue line,  
the net earnings line, growth in assets, and accompanying growth in their ability  
to finance those assets.  
•
•
Pre-tax net income had increased from $20,574,000 to $29,113,000, a 40%  
increase very impressive.  
There had been an increase of over 30% in their activity from $773,452 to  
$
1,005,992,000 financed from a variety of sources: Castor had raised  
approximately $12,000,000 more of equity capital (From $48,140,000 to  
$
$
$
58,933,000); the retained earnings of the company had increased from  
28,466,000 to $39,783,000; the subordinated debentures had increased from  
41,770,000 to $52,717,000; Loans and advances from shareholders had  
increased from $21,300,000 to $43,042,000, such an increase constituting a vote  
2
353  
354  
Lowenstein, March 21, 2005, p.59  
2
Lowenstein, March 21, 2005, pp.59-61  
500-05-001686-946  
PAGE: 437  
of confidence from the shareholders; Bank loans had increased from  
$
289,131,000 to $376,531,000, which demonstrated that the banks were  
prepared to assist in the growth of the company; notes payable had increased  
from $327,640,000 to $441,236,000, which was a substantial increase, again  
indicating that the company was able to find sources to finance its growth.  
•
•
The company had liquid assets of $122,544,000, which had increased from  
$89,421,000.  
The category "Accrued interest and other receivables" had only increased from  
$
17,610,000 to $18,009,000, which indicated that despite the approximate 30%  
increase in the investment portfolio, seemingly the company was even more  
promptly collecting interest on its mortgages, which attests to the credit quality of  
the mortgage portfolio.  
•
•
Castor was matching its liabilities against its assets.  
There was no separate line for a provision for loan losses or loan loss write-offs.  
In a company of Castor’s nature, that is very significant: the very fact that there  
was no separate line for a provision for loan losses, coupled with the fact that  
there was no mention of any specific unusual accounting policies with respect to  
loan losses, led a reader to conclude that there were no material loan losses.  
2
355  
Castor’s portfolio was operating extremely well.  
Highlights (1989)  
2118] Lowenstein described the highlights the 1989 audited consolidated financial  
[
statements of Castor as follows:  
•
•
•
Outstanding, excellent progress.  
The investment portfolio has grown by approximately 40%.  
The cash position has gone down by approximately $30,000,000, which suggests  
that Castor had used some of its cash to invest in its main activities, investment  
in a mortgage portfolio, but there still is a significant cash cushion of  
$92,000,000.  
•
Castor’s offsetting liabilities, particularly notes payable, the way they've financed  
the business, has kept pace with the growth of the company.  
2355  
Lowenstein, March 21, 2005, pp.61-85  
500-05-001686-946  
PAGE: 438  
•
•
•
Gross revenue has increased by almost 50%, from $132,000,000 to  
$197,711,000.  
Pre-tax net income of $29,113,000 in 1998 going up to $37,843,000, a 28%  
increase which is good solid growth, good performance.  
There is no separate provision for loan losses in either the body of the financial  
statements or any reference to any change in accounting policies under the note  
number 1, or any other note with respect to loan losses.  
•
•
The company continues to be well matched (assets versus liabilities).  
The auditors have again issued an unqualified report2356  
.
Highlights (1990)  
2119] Lowenstein described the highlights the 1990 audited consolidated financial  
[
statements of Castor as follows:  
•
•
•
Growth in the investment portfolio from $1,424,000 to $1,689,973,000.  
Cash is back up by approximately close to a third.  
The growth of the business continues to be financed by an increase in financing  
obtained from note holders and bankers.  
•
•
Castor has experienced approximately a 25% increase in its gross revenues,  
from $197,711,000 to $259,246,000.  
Net income before income taxes has only slightly increased, which suggests a  
maintenance of the company's significant profitability but not growth in the  
profitability, which in turn suggests that either the company's general and  
administrative expenses have grown faster than the revenue line has, or there  
has been compression of the interest rate spread.  
•
The company's matching continues to be in line, satisfactory. The company  
continues to be well matched.  
2356  
Lowenstein, March 21, 2005, pp.167-171  
500-05-001686-946  
PAGE: 439  
•
There is no separate disclosure of a provision for loan losses and no change in  
—
no highlighting of any change in the accounting policy approach used for loan  
losses.  
•
The auditors have issued an unqualified report2357  
.
Results over a five year period  
2120] Commenting Castor’s statements and comparative results over a five year  
[
period, all from the consolidated audited financial statements and reproduced on C&L’s  
2
358  
letterhead with C&L’s Legal for Life Certificate , Lowenstein concluded:  
•
•
Solid growth, most impressive growth over a five-year period.  
Impressive growth in the financial service sector: the asset growth, the ability for  
the company to finance that growth, the increase in revenue and the increase in  
net earnings.  
2
357  
358  
Lowenstein, March 21, 2005, pp. 171-175  
Lowenstein, March 21, 2005, p.85  
2
500-05-001686-946  
PAGE: 440  
T he 1988, 1989 and 1990 audited financial statements of Castor were materially misstated and  
misleading  
Professional standards  
[
2121] The objective of an audit of financial statements of a company is to express an  
opinion whether the financial statements present fairly, in all material respects, the  
financial position, results of operations and changes in the financial position in  
accordance with GAAP2  
359  
.
[
2122] An assumption underlying the preparation of financial statements in accordance  
with GAAP, commonly referred to as the "going concern" assumption, is that the  
enterprise will be able to realize assets and discharge liabilities in the normal course of  
2
360  
.
business for the foreseeable future  
[
2123] In performing his or her examination, the auditor seeks reasonable assurance  
2361  
.
that the financial statements taken as a whole are free of material misstatement  
[
2124] The concept of materiality recognizes that some matters, either individual or in  
the aggregate, are important if financial statements are to be presented fairly in  
accordance with GAAP2  
362  
.
[
2125] A misstatement or the aggregate of all misstatements in financial statements is  
considered to be material if, in the light of surrounding circumstances, it is probable that  
the decision of a person who is relying on the financial statements, and who has a  
reasonable knowledge of business and economic activities would be changed or  
2
363  
.
influenced by such a misstatement or the aggregate of all misstatements  
[
2126] Misstatements in financial statements arise from departures from GAAP and  
include departures from fact, inappropriate determination of accounting estimates, and  
2
364  
.
omissions of necessary information  
[
2127] Absolute assurance in auditing is not attainable due to such factors as the need  
for judgment, the use of testing, the inherent limitations of internal control, and the fact  
that much of the evidence available to the auditor is persuasive rather than conclusive  
in nature2 . In other words, every audit presents the risk that the auditor will fail to  
365  
2359  
2360  
2361  
2362  
2363  
2364  
2365  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5000.01  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5510.51  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5000.04  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5130.04  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5130.05  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5130.05  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5000.04  
500-05-001686-946  
PAGE: 441  
express a reservation in his or her opinion on financial statements that are materially  
misstated.  
[
2128] In all cases, as mentioned in the italicized recommendation 5130.24 “The nature,  
extent and timing of the auditor's procedures should be designed so that, in the auditor's  
professional judgment, the risk of not detecting a material misstatement in the financial  
2
366  
.
statements is reduced to an appropriately low level”  
[
2129] To establish “the nature, the extent and the timing of his or her procedures”, the  
auditor needs first to plan the audit and to establish levels of risk.  
[
2130] To plan properly, a prerequisite to any serious audit, the auditor needs to know  
2367  
He can gain or update such knowledge through various  
his client’s business.  
methods and sources:  
•
•
Reviewing working papers of previous years’ engagements.  
Reading financial information such as interim financial reports, budgets and  
forecasts.  
•
Consulting sources of information such as accounting and auditing  
pronouncements, industry publications, research studies, textbooks, periodicals,  
financial newspapers, and financial statements of other enterprises in the  
industry.  
•
•
•
Considering applicable statutory and contractual requirements.  
Visiting the client’s business place(s).  
Consulting knowledgeable individuals (authors) within or outside the enterprise.  
[
2131] Since the auditor has to understand the events, transactions and practices that  
may have a significant effect on his or her examination (and on the nature, extent and  
timing of his audit procedures) or on the financial statements, he or she has to gain  
sufficient knowledge of the client’s business to discharge adequately this professional  
duty.  
[2132] There are 3 components to audit risk:  
Inherent risk – the risk of a material misstatement occurring in the first place;  
Control risk – the risk that the client’s internal controls will not prevent or detect a  
material misstatement;  
2
366  
367  
PW-1419-1A, PW-1419-2A and PW-1419-3A  
2
PW-1419-1A, section 5140 (1988); PW-1419-2A, section 5140 (1989); PW-1419-3A, section 5140  
(
1990)  
500-05-001686-946  
PAGE: 442  
Detection risk – the risk that any material misstatement that has not been  
corrected by the client’s internal control will not be detected by the auditor2  
368  
.
[
2133] Before they started their audits of the 1988, 1989 and 1990 financial statements  
of Castor, C&L had to assess the inherent risk. As section 5130.16 of the Handbook  
stipulates, “The purpose of assessing inherent risk is to assist the auditor in determining  
the nature, extent and timing of his or her auditing procedures by identifying balances or  
2
369  
”
transactions that are susceptible to misstatement.  
[
2134] As per section 5130.22 of the Handbook, C&L’s objective had to be the reduction  
of the risk of not detecting a material misstatement to an appropriately low level, the  
determination of that level calling for the exercise of professional judgment on their  
2
370  
.
part  
[
[
2135] A direct relationship exists between materiality and audit risk.2371  
2136] Throughout an audit, decisions concerning materiality and audit risk are among  
the most significant because they form the basis for determining the extent of the  
auditing procedures to be undertaken. Therefore, these decisions should be addressed  
and documented at the planning stage of the engagement and revised, if need be,  
during the engagement2  
372  
.
[
2137] Finally, and in all cases, as the italicized recommendation 5130.40 stipulates “If,  
based on the audit evidence obtained, the auditor concludes that the financial  
statements are materially misstated, he or she should request that management  
address the material misstatement. If management does not appropriately address the  
2
373  
misstatement, the auditor should express a reservation in his or her report.”  
Evidence  
[
2138] The CHL Audit Planning Memorandum for 1988 included an “Assessment of Risk  
2374  
On a consolidated basis, the materiality levels were set at $400 000  
and Materiality”.  
for income items, and at $900 000 for net assets or other items affecting the balance  
sheet:  
the calculation is done showing both for the unconsolidated financial statements  
of Castor Holdings Ltd. and the consolidated financial statements, the  
2368  
2369  
2370  
2371  
2372  
2373  
2374  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5130.10  
PW-1419-1A, PW-1419-2A and PW-1419-3A  
PW-1419-1A, PW-1419-2A and PW-1419-3A  
PW-1419-1A, PW-1419-2A and PW-1419-3A, section 5130.23  
PW-1419-1A, PW-1419-2A and PW-1419-3A, sections 5130.25, 5130.29 and 5130.30  
PW-1419-1A, PW-1419-2A and PW-1419-3A  
PW-1053-24, seq. pp. 347-358.  
500-05-001686-946  
PAGE: 443  
considerations for materiality and it's broken down between items that would  
affect the income statement and items that would affect net assets or the balance  
sheet, and the materiality level for income items on a consolidated basis, which  
are the financial statements at PW-5, is four hundred thousand dollars  
(
$400,000), and for the net assets or affecting the balance sheet, is nine hundred  
2375  
thousand dollars ($900,000)..  
[
2139] The CHL Audit Planning Memorandum for 1989 included an “Assessment of Risk  
2376  
On a consolidated basis, the materiality levels were set at $556,000  
and Materiality”.  
for income items, and at $1,100 000 for net assets or other items affecting the balance  
sheet:  
And for nineteen eighty-nine (1989), the planning memorandum is PW-1053-20-  
1
. Sequential page 257, at the foot of the page again is the materiality  
calculation, and again it's done on a consolidated basis and unconsolidated, and  
of interest in this case is the consolidated financial statements where the  
calculations for consolidation and net income items, and the amount is five  
hundred and fifty-six thousand dollars ($556,000), and for net assets, it's one  
million one hundred thousand dollars ($1,100,000).2  
377  
[
2140] The CHL Audit Planning Memorandum for 1990 included an “Assessment of Risk  
2
378  
In 1990, C&L used a different method and came up with only one  
and Materiality”.  
2
379  
materiality level of $2,135,000, on a consolidated basis.  
And for nineteen ninety (1990), the planning memorandum is PW-1053-16-1.  
And this, in this year, the approach is slightly different, it's now using three (3)  
components and taking an average, and that is set out on page, sequential page  
2
64, and this calculation, insofar as the consolidated financial statements are  
concerned, is at the foot of the schedule or last tabulation, where one percent  
(
(
1%) of revenue is used, five percent (5%) of profit before taxes and one percent  
1%) of net assets. Their total is then divided by three (3) to get a one materiality  
number that is used, rather than two (2) in the past two (2) years, but the  
materiality level for the nineteen ninety (1990) consolidated financial statements  
is two million one hundred thirty-five thousand dollars ($2,135,000).2380  
[
2141] Asked in his cross-examination what level of materiality he would suggest the  
Court use to assess the evidence, Selman answered “The audit working papers contain  
a materiality level and since that was the judgment of the auditors to use that materiality  
level, initially that would be the level that I would apply”  
2
381  
.
2375  
2376  
2377  
2378  
2379  
2380  
2381  
PW-1053-24, sequential page 349; Vance, March 6, 2008, p. 23  
PW-1053-20, sequential page 257  
Vance, March 6, 2008, pp.23-24  
PW-1053-16  
PW-1053-16, sequential page 264  
Vance, March 6, 2008, p.24  
Selman, June 4, 2009, p.123  
500-05-001686-946  
PAGE: 444  
[
2142] Disclosure issues have to be looked at differently, acknowledged Selman: they  
2382  
For  
shall be looked at on a qualitative basis rather than on a quantitative basis.  
example, a related party transaction will generally be disclosed even though it is well  
under the materiality level otherwise calculated because the relationship is important to  
the reader.  
[
2143] Selman was asked specifically if the Court should apply the materiality level  
chosen by C&L in the CHL’s Audit Planning Memorandums, i.e. $400,000 for income  
and $900,000 for assets2 in 1988. Selman answered:  
383  
It's a difficult question. Let me address it this way. We're dealing firstly with the  
financial statements and not disclosure, just to make that clear. The materiality  
levels that you have reflected there (…) to my mind, are on the low side. I would  
personally not go as low as that in terms of the materiality in an audit of the size  
of Castor with the figures that we had in the financial statements.  
However, those are the materiality levels that the auditors chose and in making a  
judgment that those were the appropriate materiality levels to use, it seems to me  
that that judgment has to have some bearing on the assessment of the audits. If  
they consciously chose those materiality levels, I'm not sure whether the fact that  
I think they're a little low really should carry a great deal of weight or not. I just  
don't know.  
So, all I'm saying here is I would make a professional judgment more in the line  
of the two and a half (2½) million in nineteen ninety (1990) against income, and  
relate that to the level of income in eighty-nine ('89) and eighty-eight ('88), sort of  
that percentage, in general, you can go... I've seen as high as ten percent (10%)  
on income levels, but most people seem to come down and around the five  
percent (5%) range.  
On assets of something like a billion dollars, almost two (2) billion dollars in  
nineteen ninety (1990), a bit, a million nine hundred thousand (1,900,000), on  
assets, against a balance sheet which is getting very close to two (2) billion  
dollars, it seems like a fairly low number and if they had chosen three (3) million  
or four (4) million as the materiality level, I wouldn't have raised my eyebrows  
about that at all. So, it's a choice, they were very conservative in their choice of  
materiality levels, in my opinion.2  
384  
[
2144] After lunch, the same day, before his cross-examination resumed, Selman  
clarified his position as follows:  
I wanted to go back to the last question and just to clarify, when we were talking  
about materiality, there is not a direct relationship between the materiality level  
that the auditor chooses in order to make an assessment of individual items that  
2382  
2383  
2384  
Selman, June 9, 2009, pp.246-257  
PW-1053-24, 10 sequential page 349  
Selman, June 4, 2009, pp.124-126  
500-05-001686-946  
PAGE: 445  
may be in his view errors or misstatements from what he thinks they should be,  
or the aggregation of them, there's not a direct relationship between that and  
between the concept of material misstatement of the financial statements as a  
whole. The test remains a subjective test and it is found in section 5130.05, .06,  
.
07 and .08 of the handbook, and so it would be obvious, I think, that an auditor  
chose a materiality level of five hundred thousand dollars ($500,000) or  
something in that order for the assets on a financial statement that held  
something in the order of a billion dollars in assets, a misstatement of five  
hundred thousand dollars ($500,000) would not affect the decisions of a  
reasonable reader as user of the financial statements as set out in the handbook.  
Five hundred thousand dollars ($500,000), a billion dollars, is nothing. On the  
other hand, if it was fifty (50) million dollars or... Fifty (50) million dollars or five  
percent (5%) of the billion dollars, it would have potentially a different  
assessment. So, the subjectivity of what is a material misstatement of the  
financial statements as a whole is not directly related to the decision that the  
auditor makes as to what he will bring forward or where he will cease to continue  
his testing in terms of the materiality level. He may decide that if he finds  
something under five hundred thousand dollars ($500,000), he won't look at it, it  
2385  
won't be of concern to it.  
[
2145] The term “materiality” is defined in the Handbook from the perspective of the  
user of the financial statements.  
[
2146] Meigs writes: «In the opinion of the authors, the essence of the CICA position is  
to equate the quality of presenting fairly with that of not being misleading or not being  
materially misstated. Financial statements must not be so presented as to lead users to  
forecasts or conclusions that a company and its independent auditors know are  
2
386  
2387  
unsound or unlikely».  
The same idea is also found in Anderson’s text book , in the  
2
388  
2389  
MacDonald Commission report , and in Gibbins & Mason’s text book.  
[
2147] Vance, Froese and Rosen have opined that the 1988, 1989 and 1990  
consolidated audited financial statements of Castor were materially misstated and  
misleading. In their testimonies and in their written reports they have given numerous  
examples illustrating such conclusions.  
[
2148] Defendants’ expert Selman agreed that Castor 1988, 1989 and 1990 audited  
consolidated financial statements would be materially misstated and misleading if the  
Court was to conclude that LLPs, as suggested by Plaintiff’s experts, were required.  
2385  
2386  
2387  
2388  
2389  
Selman, June 4, 2009, pp.129-130  
PW-3053-1, p. 29  
PW-1421-22, pp. 552-554  
PW-1432A, p. 50, paragraph 3.45  
PW-2917, pp. 126-127  
5
00-05-001686-946  
Conclusions  
2149] The objectives of financial statements, the materiality and relevance of  
PAGE: 446  
[
information communicated in financial statements are all assessed from the perspective  
2
390  
of the utility of the information for readers.  
2150] Readers want to have information communicated to them to evaluate the liquidity  
[
and solvency of an enterprise and to assess the ability to generate cash from internal  
2
391  
.
sources, to repay debt obligations, to reinvest and to make distributions to owners  
[
2151] By definition, materiality is information that, if omitted or misstated, would  
2392  
influence or change a decision.  
[
2152] The omitted information and the misstated information described in the previous  
sections of this judgment are clearly material.  
[
2153] The audited consolidated financial statements of 1988, 1989 and 1990 are  
materially misstated and misleading.  
[
2154] The failure to disclose the practice and quantum of capitalized interest materially  
misled the readers of Castor’s audited financial statements.  
[
2155] Appropriate disclosure of the capitalized interest would have alerted the reader,  
namely Widdrington and his advisors, to the fact that the majority of Castor’s loans were  
non-performing in that the borrowers were unable to pay interest on their loans. This  
would have raised concerns about the collectability of the loans, and questions as to  
whether the loans were on normal commercial terms (i.e., at arm’s length).  
[
2156] Appropriate disclosure would have had a significant negative impact on the  
income, revenue and profit recorded by Castor. Capitalized interest increased  
profitability but did not improve cash liquidity. «In effect, the earnings statement of  
2
393  
Castor was showing success when the opposite was the case.»  
[
2157] Appropriate disclosure would have alerted the reader, namely Widdrington and  
his advisors, to the fact that Castor was not generating cash from operations, which  
would have been surprising since Castor was presenting itself as a spread lender and  
not as a real estate developer, and would have raised concerns about Castor’s liquidity  
and solvency.  
[
2158] Widdrington and his advisers, readers of the financial statements, were entitled  
to assume that most of the loans were producing cash income. They were also entitled  
2
390  
391  
PW-1419-1, sections 1000.12, 1000.14 and 1000.17  
PW-1419-1, section 1540.01  
2
2
392  
PW-1419-2, section 1000.14  
393  
Rosen, PW-3033, vol.1, p. 64  
2
500-05-001686-946  
PAGE: 447  
2
394  
As readers of the audited financial  
to assume that the loans were collectable.  
statements of Castor, they could not have known that Castor was tolerating the  
systematic failure of its borrowers to pay interest and fees in cash or about the degree  
to which capitalized interest and fees contributed to the falsely impressive growth in the  
loan portfolio, as represented in the audited financial statements. This information was  
not disclosed.  
[
2159] There were two Castors, Castor as depicted in its audited consolidated financial  
statements and the real Castor, as Rosen summed it up:  
(
…) when someone looks at the financial statements of Castor, they will see an  
organization that has all of the markings of a short-term lender, combined with  
the information circular, combined with note 2 that talks about maturities, and  
note 3 showing when coming due, it all adds up to short-term investing and as  
Castor moved through the eighties, into eighty-eight ('88), eighty-nine ('89) and  
ninety ('90), it was anything of the sort. It was a long-term locked in situation  
desperately in need of cash2  
395  
.
[
2160] From the face of the 1988, 1989 and 1990 consolidated audited financial  
statements, it was evident that there was no Statement of Change in Financial Position  
(
“SCFP”). In the scope paragraph of the audit opinion, there is no reference whatsoever  
to a presentation of changes in the financial position, whereas there are clear  
references to changes in net invested assets.  
[
2161] The audit opinion explicitly stated: “We have examined the consolidated balance  
sheet of Castor Holdings Ltd. as at December 31, 1988 and the consolidated  
statements of earnings, retained earnings and changes in net invested assets for the  
year then ended.(…)…In our opinion, these consolidated financial statements present  
fairly the financial position of the company as at December 31, 1988 and the results of  
its operations and the changes in its net invested assets for the year then ended in  
accordance with GAAP (…)” (our emphasis)  
[
2162] Even if the user had read only the audit opinion, he would not have been misled  
as to the content of the financial statements on which C&L gave an opinion: there was  
no SCFP and C&L was not opining on such a statement.  
[
2163] However, there should have been a SCFP. In the absence of such a statement,  
and given the fact that information about activities and their effects on cash resources  
was neither readily apparent from other financial statements, nor adequately disclosed  
in the notes, the financial statements were not in accordance with GAAP. C&L should  
have qualified their audit opinion, which they did not.  
2
394  
395  
Morrison, October 10, 2006, pp. 131-132, pp. 140-143; Morrison, October 12, 2006, pp. 70-71.  
Rosen, February 3, 2009, pp.47-48  
2
500-05-001686-946  
PAGE: 448  
[
2164] The above mentioned information, which was withheld, was certainly material  
information from the point of view of an investor or a lender.  
[
2165] Rather than being an appropriate alternative, the presence of the Statement of  
Changes in Net Investment Assets (“SCNIA”), and its format in the 1988, 1989 and  
990 consolidated audited financial statements, participated in the misleading effect.  
1
[
2166] The most compelling proof that the SCNIA was materially misleading to a reader  
2396  
is the testimony of Cunningham and Hayes , the second partners in charge of the  
2
397  
Castor audit, as well as that of Higgins , the peer review partner.  
2167] Cunningham and Hayes, the second partners in charge of the Castor audit, both  
[
testified as to their understanding of the SCNIA: this statement disclosed cash  
2
398  
generated from Castor’s operations . In fact, the SCNIA disclosed no such  
information.  
[
2168] Higgins, the peer review partner, acknowledged that the SCNIA did not disclose  
cash generated from operations and that the Handbook recommended that this be  
done2  
399  
.
[
2169] The failure to use a properly prepared SCFP had an effect which was to  
misrepresent to a user of Castor’s financial statements the carrying value of its assets,  
its profitability, its liquidity and the maturities of its assets. Each of these items was very  
material to a user. In acceding to the request of its client, C&L permitted Castor to avoid  
the disclosure of information that was material to a user of the financial statements.  
[
2170] A reader of the 1988, 1989 or 1990 consolidated audited financial statements  
would not conclude that Castor needed necessarily the money of others to go on, while  
in fact, it did. The reader was provided with the illusion that all was well: the loan  
portfolio was growing with good assets, most of which were maturing within the  
following year, with no or very little loan loss provision. Had a proper SCFP been  
2
400  
.
provided, things would have looked otherwise  
[
2171] In 1989, the net earnings of Castor were $28.4 million according to the  
2401  
The same figure appeared in the  
consolidated statement of retained earnings.  
SCNIA as “net assets available for investments provided from operations”. None of  
these figures represented cash or cash equivalents. However, and as previously  
mentioned, Hayes and Cunningham, both partners of C&L, were misled and believed  
otherwise.  
2396  
2397  
2398  
2399  
2400  
2401  
Hayes, October 31, 1995, pp. 85-87; Cunningham, December 13, 1996, p. 85-88.  
Higgins, December 18, 1996, pp. 110-114.  
Hayes, October 31, 1995, pp. 85-87; Cunningham, December 13, 1996, p. 85-88.  
Higgins, December 18, 1996, pp. 110-114.  
Vance, March 4, 2008, PM transcription, pp.60-61; Vance March 10, 2008, pp.44 and following  
PW-5, tab 11  
500-05-001686-946  
PAGE: 449  
[
2172] Had a proper SCFP been provided in 1989, it would have shown a negative  
figure of “cash from operations” given that there was capitalized interest for at least $53  
2
402  
million as identified by Belliveau during the audit.  
[
2173] A negative figure of “cash from operations” would have told any reader of the  
financial statements, namely Widdrington and his advisors, that Castor, in trying to  
generate cash from its operations, was doing very poorly, and that it would have had  
either to sell investments or to entice new investments through debt or equity in order to  
do better.  
[2174] Castor intended Notes 2, 3 and 4 of the audited consolidated financial  
statements to provide information concerning the matching of current assets and current  
liabilities, which is critical to an understanding of the company’s liquidity and solvency.  
The assessment of liquidity focuses on the short-term, i.e., the year following the  
financial statements, and evaluates the ability of the company to meet its obligations as  
they become due and in the normal course of business. Since Castor prepared a non-  
classified balance sheet, a reader had to refer to those notes in order to evaluate the  
company’s short-term obligations as well as the company’s ability to meet these  
obligations.2  
403  
[2175] The contradiction between what notes 2, 3 and 4 conveyed to readers, such as  
Widdrington and his advisers, and the reality of the situation was described by  
Defendants’ expert Morrison, in the following words: «There was a strong indication that  
the mortgages were being renewed, rolled over, and if you had the details of the  
mortgage portfolio over time, I think that would have, with hindsight, been very  
evident…. it was indicated that there was a screaming contradiction here about the  
fundamental nature of Castor's business. It was effectively making much longer-term  
2
404  
loans, whatever the contract period. » (our emphasis)  
[
2176] During their audit work, having access to accounting books and records and to  
loan files, the auditors should have seen such “screaming contradiction”. They should  
have foreseen the misleading nature of the information conveyed by notes 2, 3 and  
2
405  
Defendants’ expert Morrison acknowledged that there was no way for a reader of  
4
.
the financial statements to infer from the notes 2, 3 and 4 that the loans were not  
2
406  
collectible as at their maturity dates.  
[
2177] Notes 2, 3 and 4 disclosed a false picture of liquidity matching and solvency: they  
were misleading.  
2402  
2403  
2404  
2405  
2406  
PW-1053  
PW-2908, Vol. 1, p. 4-F-1.  
Morrison, October 4, 2006, p. 129.  
Rosen, February 5, 2009, pp. 83-85.  
Morrison, October 12, 2006, pp. 70-71.  
500-05-001686-946  
PAGE: 450  
[
2178] Castor’s 1988, 1989 and 1990 audited consolidated financial statements were  
misleading as a result of the $100 million debenture transaction entered into by Castor  
in 1987 and noted to the financial statements.  
[
2179] The $100 million transaction was a cash circle, and Selman admitted that the  
1
988, 1989 and 1990 consolidated audited financial statements were materially  
2407  
.
misstated and misleading, if it was such  
[
2180] The 1988, 1989 and 1990 consolidated audited financial statements were  
misleading because of the non-disclosure of numerous related party transactions.  
[
2181] The 1988, 1989 and 1990 consolidated audited financial statements were also  
2408  
misleading because of the non-disclosure of restricted cash.  
[
2182] Moreover, and as pointed out by Selman, a significant increase in accrued  
interest and other receivables would have indicated the deterioration in Castor’s  
position.2  
409  
[
2183] The misleading nature of the reallocation of accrued interests was compounded  
by the fact that the investments were described as being carried at cost and there was  
no disclosure to a reader that the investments in mortgages, secured debentures and  
advances were being carried at cost plus accrued interest, as shown in the financial  
statements of trust companies. As a consequence, this vital information was concealed  
from a user of Castor’s financial statements.  
[
2184] Huge loan loss provisions should have been taken. As Selman pointed out, if the  
Court was to conclude that such loan loss provisions were required, nothing else in the  
case was really relevant anymore since a clean audit opinion, based on Castor being a  
2
410  
going concern, could not have been possible.  
[2185] The Court shares Vance’s conclusion that: «considering the extent of the  
misstatements in the consolidated financial statements of Castor for the year ended  
December 1988 (also applicable to 1989 and 1990), C&L should not have issued  
unqualified opinions on these financial statements, but should have either denied an  
opinion or issued an adverse opinion indicating the extent to which the financial  
statements were materially misleading and stating that these financial statements did  
not present fairly the financial position, results of operations and changes in financial  
position of Castor.»2  
411  
2407  
2408  
2409  
2410  
2411  
Selman, May 25, 2009, pp. 28-29  
Vance, March 13, 2008, pp.28-29; PW-2908A.  
D-1295, pp. 171-173, paras. 5.03, 5.05, 5.06.  
Selman, May 8, 2009, pages 182-183  
PW-2908, Vol. 1, S-25; See also PW-3033, pp. 1-3; PW-3034, pp. 9-11, at p. 11.  
500-05-001686-946  
PAGE: 451  
Did C&L commit a fault in the professional work that they  
performed in connection with the audits of Castor for 1988,  
1989 and 1990?  
Conclusion  
[
2186] Because C&L did not conduct their audits in accordance with GAAS and  
because C&L cannot successfully plead fraud to excuse themselves, the Court  
concludes that C&L committed a fault in their professional work in connection with the  
audits of Castor for 1988, 1989 and 1990.  
C&L did not conduct their audit of 1988, 1989 and 1990 in  
accordance with generally accepted auditing standards  
(
“GAAS”)  
[
2187] As Levi said “An audit is not a science, it's an art. There aren't specific  
compartments that you can put it into and make it black or white, and this is why you  
have the issue of professional judgment in there, there is no strict standard procedures  
2
412  
.
that will apply to every situation “  
[
2188] The objective of an audit of financial statements, as set out in section 5000.01 of  
the CICA handbook, is “to express an opinion on the fairness with which they (the  
financial statements that are audited) present the financial position, results of operations  
and changes in financial position in accordance with generally accepted accounting  
principles”2  
413  
.
[
2189] In addressing the financial statements and assertions embodied therein, the  
auditor is required to perform the audit in accordance with GAAS. These standards are  
2
414  
and read as follows:  
set out in Section 5100.02 of the CICA Handbook  
General Standard  
The examination should be performed and the report prepared by a person or  
persons having adequate technical training and proficiency in auditing, with due  
care and with an objective state of mind.  
Examination Standards  
2412  
2413  
2414  
Levi, January 11, 2010, p.164  
PW-1419-1A (1988), PW-1419-2A (1989) et PW-1419-3A (1990)  
PW-1419-1A (1988), PW-1419-2A (1989) et PW-1419-3A (1990)  
500-05-001686-946  
PAGE: 452  
(
i)  
The work should be adequately planned and properly executed. If  
assistants are employed, they should be properly supervised.  
(
ii)  
There should be an appropriately organized study and evaluation of those  
internal controls on which the auditor subsequently relies in determining  
the nature, extent and timing of auditing procedures.  
(
iii)  
Sufficient appropriate audit evidence should be obtained, by such means  
as inspection, observation, enquiry, confirmation, computation and  
analysis, to afford a reasonable basis to support the content of the report.  
Reporting Standards  
(
(
i) The scope of the auditor’s examination should be referred to in the report.  
ii) The report should contain either an expression of opinion on the financial  
statements or an assertion that an opinion cannot be expressed. In the latter  
case, the reasons therefore should be stated.  
(
iii) Where an opinion is expressed, it should indicate whether the financial  
statements present fairly the financial position, results of operations and changes  
in financial position in accordance with an appropriate disclosed basis of  
accounting, which except in special circumstances should be generally accepted  
accounting principles. The report should provide adequate explanation with  
respect to any reservation contained in such opinion.  
(
iv) Where an opinion is expressed, the report should also indicate whether the  
application of the disclosed basis of accounting is consistent with that of the  
preceding period. Where the basis or its application is not consistent, the report  
should provide adequate explanation of the nature and effect of the  
inconsistency.  
[
2190] GAAS deal with the planning of the audit, the execution of the audit, and the  
reporting of the results of the audit.  
[
2191] C&L provided their own guidance to staff regarding their approach to audits and  
policies. For the relevant years, C&L issued three types of such material:  
•
•
•
Technical Policy Statements (“TPS”);  
Memoranda by the C&L’s National Office referred to as “AM”  
“Tips and Tidbits”, a newsletter issued by the National Research Department.  
500-05-001686-946 PAGE: 453  
[
2192] For their audits of 1988, 1989 and 1990, C&L did not comply with GAAS, namely  
in that:  
•
The engagement partner of these audits, Wightman, lacked independence  
and did not have an objective state of mind.  
•
•
The planning of the audits was inappropriate.  
The audit examination was performed without due care and by persons that  
did not have adequate technical training or proficiency in auditing.  
•
•
The assistants were not properly supervised.  
The auditors failed to gather sufficient appropriate audit evidence: the auditor  
failed to use adequate and sufficient means to afford a reasonable basis to  
support the content of their report.  
•
The auditors rendered an unqualified opinion without obtaining sufficient  
appropriate audit evidence to provide a basis to support the content of their  
report.  
L ack of independence and of an objective state of mind  
Positions  
Plaintiff’s position  
[
2193] Plaintiff argues that:  
•
It is a fundamental tenet of GAAS that an auditor must approach an audit with  
an objective state of mind. Because an auditor’s unqualified audit opinion  
gives credibility to management’s presentation of the company’s financial  
position in its financial statements, the auditor has to speak freely and without  
influence. When the auditor is not independent of his audit client, every  
exercise of his professional judgment is called into question.  
•
•
Wightman was not independent of Castor, or its principal, Stolzenberg, and  
this detrimentally affected the conduct of the audits of Castor, including those  
conducted for the years ending 1988, 1989 and 1990.  
Wightman’s objectivity was compromised by his intimate involvement as an  
advisor, a friend, a supporter and promoter of Castor, and by the numerous  
business relationships that he had with both Castor and Stolzenberg, outside  
of Castor, which he did not disclose to his partners in his annual declarations.  
5
00-05-001686-946  
Defendants’ position  
2194] Defendants argue that:  
PAGE: 454  
[
•
Plaintiff has alleged that Wightman lacked independence and objectivity  
during 1988-1990 arising from certain investments made with Stolzenberg,  
and from the fact that he introduced Stolzenberg and Castor to several  
business opportunities, but no other C&L auditor is accused of a lack of  
objectivity, and Plaintiff does not link the perceived lack of objectivity to any  
GAAS or GAAP failure.  
•
•
•
The allegations relating to Wightman’s independence are made to colour the  
file and to influence the Court’s appreciation of Wightman’s personal  
character.  
Since the Court is not seized with a complaint about a breach of the Quebec  
Code of Ethics, or with the removal of C&L under the NBBCA, she should  
reject the allegations as being irrelevant to a professional liability case.  
The only matter relevant is whether Wightman had an “objective state of  
mind”, as required by the Handbook, and there is no evidence that he did not.  
Court’s conclusion on relevance of allegations relating to independence  
[2195] Independence, and evidence in relation to independence, is relevant.  
[
2196] No auditor can comply with GAAS if he does not perform an audit with an  
objective state of mind.  
[
2197] Whether or not C&L’s audits of 1988, 1989 and 1990 were performed in  
compliance with GAAS is at the heart of the debate.  
[
2198] Wightman was the engagement partner on the 1988, 1989 and 1990 audits and  
the only person at C&L who had complete knowledge of the client’s business.  
Wightman was the person handling the wrap-up meetings with Stolzenberg and the  
person who had the final say as to the issuance and content of the audit reports.  
[
2199] Evidence purporting to shed light on Wightman’s various business interactions  
with Castor and Stolzenberg is relevant to what his state of mind was or might have  
been at any given time.  
[
[
2200] Moreover, credibility and reliability of witnesses’ sayings are crucial.  
2201] Wightman’s actions or omissions, namely in the context of his obligations  
towards his partners, and Wightman’s views on such constitute tools to assess  
credibility and reliability. They are therefore also relevant to said purpose.  
500-05-001686-946  
PAGE: 455  
Professional standards and other tools  
[
2202] The following sources of professional standards governing auditors’ conduct and  
independence are relevant.  
[
2203] The Handbook2 provides that the audit shall be performed “with due care and  
415  
with an objective state of mind”.  
2
416  
provides that  
[
2204] The Code of Ethics of Chartered Accountants Regulation  
accountants who are called upon to express opinions on financial statements must be  
free of influence that may impair, or be perceived as impairing, their professional  
judgment or objectivity and that an accountant cannot represent more than one party in  
the same transaction2  
417  
.
2
418  
stipulates that a person is disqualified  
[
2205] The New Brunswick Corporations Act  
from acting as an auditor of a corporation if he or she is not independent of the  
corporation being audited, its affiliates or the directors or officers of such corporation or  
any of its affiliates.  
[
2206] Although it is not a professional standard but primarily a matter of partnership  
governance (it regulates conduct and disclosure as between partners), the C&L Policy  
2
419  
is also relevant. Besides, such policy is  
of Professional Independence (TPS-A-104)  
very specific in stating its intent:  
“
This policy statement sets forth the Firm’s policy of professional independence.  
It neither describes nor supersedes standards of independence required by  
various statutes or the rules of conduct of the provincial institutes or Ordre.  
Partners and professional employees should be familiar with and adhere to such  
standards.”  
[
2207] C&L Policy of Professional Independence defines C&L’s expectations, on which  
C&L partners and employees interact with each other, namely as members of an audit  
team.  
Evidence  
[
2208] Wightman was implicated in Castor’s affairs, far beyond his role as Castor’s  
auditor.  
2
415  
PW-1419-1A, Section 5100.02 and 5100.04 (1988); PW-1419-2A, Section 5100.02 and 5100.04  
(
1989); PW-1419-3A, Section 5100.02 and 5100.04 (1990)  
PW-2311 Para 3.02. 3.02.05 and 3.02.06  
PW-2311, Para. 3.02.05.  
2416  
2417  
2418  
2419  
PW-2312-1. Sections 104(1) and 104(2)  
PW-1420-1A.  
500-05-001686-946  
PAGE: 456  
[
2209] Wightman was the architect of Castor’s corporate structure since its inception in  
1
978 until its demise in 1992.  
[2210] Wightman played an important role as a promoter of Castor.  
[
2211] Wightman introduced Castor to various investment and business opportunities:  
Cafa Financial Corporation, Ouimet Hubbs, Orion Maritime Inc., Brandywine & Iotech  
Corporation and potential Coat-Hangers (Laurentian Group, JT/Guardian and  
Sensormatic)  
[
2212] Wightman introduced Stolzenberg and Castor to many opportunities in which he  
was involved, including Chur, Petra and Sloppin, Baxter Street, CMF and Expo  
Overseas2  
420  
.
[
2213] Wightman invested Sloppin’s money in various companies, some of which he  
was the auditor of, which he introduced to Stolzenberg who, himself, acquired a  
financial interest in the company’s affairs: Pigments & Chemical, Compagnie de  
Recyclage de Montréal, Perkins Paper and Ideal Metals.  
Implication in Castor’s affairs  
[
2214] Wightman was involved in the development of Castor’s corporate structure prior  
to its inception. He was part of the decision to liquidate Castor Holdings Inc., and to  
2
421  
incorporate CHL in New Brunswick.  
[
2215] When Castor was incorporated at the end of 1977, C&L became its auditors, and  
remained so until its eventual demise in 1992.  
[
2216] Much like he had done with its predecessor, Castor Holdings Inc., Wightman was  
deeply implicated in Castor’s affairs, and his implication went far beyond his role as an  
auditor2  
422  
.
[
2217] During the relevant years, Castor accounted for 7 to 10% of Wightman’s  
personal billings in Montreal, and this, exclusive of work which was done for other  
clients or himself, in which he involved Castor or Stolzenberg, and for which Castor was  
not charged2  
423  
.
[
2218] The revenue for the provision of special services by C&L to Castor accounted  
2424  
.
for almost three times the auditing revenue  
2420  
2421  
2422  
2423  
2424  
PW-3095  
Wightman, September 5, 1995, p. 156.  
PW-3101: Review of services.  
Wightman, September 7, 1995, pp. 98-101.  
PW-1053-2A-4, PW-1053-2A, seq. pp. 29, 103, 110  
500-05-001686-946  
PAGE: 457  
[
2219] As it appears from C&L’s invoices for professional services rendered, Wightman  
2
425  
and C&L were involved in all facets of Castor’s business , including:  
•
Consideration of various business ventures, such as the acquisition of oil and  
gas drilling projects, the purchase of scientific research credits, consideration of  
the acquisition of a hotel, consideration of various loans, advice with respect to  
investment in other financial services companies, including Pollux Capital and  
Cafa Financial Corporation, and advice regarding the acquisition of an aircraft, to  
name a few.  
•
•
Preparation of Legal for Life Certificates which enabled Castor to attract  
investments from institutional investors, such as pension funds, and to which  
2
426  
.
Wightman referred to present Castor  
Establishment of the fair market value of Castor shares, which were being used  
to set the price for the purchase of shares by new and existing shareholders, and  
the sale of shares by existing shareholders.  
•
•
Advice and consultation regarding changes to Castor’s share capital and the  
issuance of subordinated debentures.  
Various tax advice, with respect to matters such as the tax treatment of the  
subsidiaries, tax advice with respect to various transactions, the calculation of  
dividends and withholding taxes and, most notably, continuous correspondence  
with income tax authorities in Quebec and Canada in the context of audits to,  
among other things, justify the allocation of revenue and expenses between  
Castor and its subsidiaries.  
[
2220] Wightman frequently attended the Castor directors’ meetings in Montreal and in  
Toronto, as well as in Europe. He made presentations to the Board and he sometimes  
stayed for the whole meeting2  
427  
.
[
2221] Wightman was responsible for the development of Castor’s corporate structure  
internationally - he was the architect of Castor’s expansion to international jurisdictions,  
such as Switzerland, the Netherlands, the Netherlands Antilles, the United States,  
2
428  
Cyprus and Ireland . In addition to conceiving and structuring these subsidiaries,  
Wightman was also involved in implementing his recommendations. He helped Castor  
2
2
2
425  
426  
427  
PW-3104, PW-3105, PW-3106, PW-3107, PW-2372-25  
PW-1053-6, seq. p. 103.  
PW-3104, PW-3105, PW-3106; PW-2400-23, PW-2400-29; PW-2400-34, PW-2400-38, PW-2400-61,  
PW-2400-70; PW-2400-75, PW-2400-98, PW-2400-101.  
PW-2400-20. PW-2400-34, PW-2400-75, PW-2400-83, PW-2400-87, PW-2400-98, PW-2400-101,  
PW-2400-102  
2428  
500-05-001686-946  
PAGE: 458  
to find office space, to hire personnel and to assign people to act as directors, often  
2
429  
.
employing local C&L employees in the process  
[
2222] The role played by Wightman with respect to CH (Ireland) is a prime example of  
his integral role in setting up Castor’s subsidiaries.  
[
2223] Wightman began proposing Ireland as a potential low-tax jurisdiction in which to  
2430  
.
establish a subsidiary as early as 1984  
[
2224] Wightman conceived the concept for this entity and spearheaded the process to  
2431  
.
obtain the required approvals to bring the project to fruition  
[2225] Throughout the process, Wightman:  
•
•
negotiated with Irish authorities to obtain the required operating license2432,  
and  
was involved in :  
o incorporating the entity2433  
o hiring personnel2434  
o introducing Castor to prospective financers2435  
,
,
,
o reviewing proposed transactions for the company2436, and  
o finding clients to make use of the operations that he designed2437  
.
Role as Castor’s promoter  
2226] Wightman was considered by his client to be an important promoter of Castor  
[
among the lending community, and “having him as a friend was very key to the  
2
438  
.
promotion and goodwill of Castor”  
2227] C&L assisted Castor in developing and maintaining financing from lenders2439  
[
and depositors.  
2429  
2430  
2431  
2432  
2433  
2434  
2435  
2436  
2437  
2438  
PW-2711, Wightman, August 15, 1996, pp. 104-108.  
PW-2400-75  
Simon, May 1, 2009, pp. 126-127  
PW-2372-27  
PW-2443  
PW-2711  
PW-2452; PW-2452-1; Simon, June 17, 2009, p. 64  
PW-2455  
PW-2718  
R. Smith, May 14, 2008, pp. 110-111.  
500-05-001686-946  
PAGE: 459  
[
2228] Wightman promoted Castor to many of his friends and business associates, and  
many of them became depositors to Castor upon his initiative, advice or instruction,  
namely:  
•
Rudolph Steinmetz, Vittorio Sanguineti and Bowne of Montreal.  
•
•
Wightman requested that the financial statements and information  
memorandum be sent to Steinmetz and Sanguineti, who were his audit  
2
440  
clients, for the purpose of them making an investment in Castor.  
Both men, as well as the company in which they were principals, Bowne  
2
441  
)
of Montreal Ltd. (which was also an audit client of Wightman  
2
442  
subsequently made substantial deposits with Castor.  
•
•
Ryan Plastics.2443  
Lawrence Rodney.  
o Upon distribution of the payout of the Baxter Street investment, money  
was placed for Rodney on a short-term deposit with CHIF, at Wightman’s  
request.2  
444  
o in 1990, Wightman was still acting as an agent for Rodney in connection  
2
445  
with funds he had on deposit with Castor.  
•
Jochem Reiss.  
o Upon distribution of the payout from the Baxter Street investment,  
2
446  
Wightman instructed that funds be placed on deposit for Reiss.  
Sloppin Investments.2447  
CAFA Financial.  
•
•
o Castor became a significant shareholder in this financial services  
company that Wightman introduced to Castor, and that was also one of  
his audit clients.2  
448  
2439  
2440  
2441  
2442  
2443  
2444  
2445  
2446  
2447  
Wightman, March 11, 2010, pp. 72-75; PW-2372-28; PW-2372-29  
Simon, May 1, 2009, pp. 153-154  
Wightman June 20, 1996, pp. 57-60  
Wightman, June 20, 1996, pp. 57-58, PW-1053-25, seq. pp. 53,54, 100-103  
PW-1053-49 seq. p. 101  
PW-643  
PW-1134, bates p. 2450  
PW-643  
See paragraphs of the present judgment  
500-05-001686-946 PAGE: 460  
o Wightman is indirectly responsible for the deposit relationship that  
2
449  
developed between these companies.  
Gardex Inc.  
•
•
o Gardex Inc. deposited funds with Castor.2450  
o The principal of this company was introduced to Castor by Wightman.2451  
Colin Cope.  
o Cope was a client of Wightman.2452  
o The deposit relationship between Cope and Castor was on Wightman’s  
introduction.2  
453  
Introducing Castor to various business deals or opportunities  
[
2229] Wightman introduced Castor to significant business deals or opportunities: Cafa  
Financial Corporation, Ouimet Hubbs, Orion Maritime Inc., Brandywine & Iotech  
Corporation, potential Coat-Hangers (Laurentian Group, JT/Guardian and Sensormatic),  
Chur, Petra and Sloppin, Baxter Street, CMF and Expo Overseas.  
Cafa Financial Corporation  
[
2230] Wightman was involved in finding investors to participate in Cafa Financial, which  
2454  
became a C&L audit client.  
2455  
2231] Upon Wightman’s introduction and advice , Castor invested in this company,  
2456  
.
[
along with other Wightman clients such as the Allsops, Steinmetz and Sanguineti  
On November 1, 1986, Castor subscribed for just over 20% of its common shares and  
2
457  
.
just over 40% of its preferred shares  
2
2
2
2
2
2
448  
449  
450  
451  
452  
453  
Wightman, June 20, 1996, p. 55-57  
PW-1053-28 seq. pp. 45, 57  
PW-1053-25 seq. pp. 53-54, 112  
Simon, May 1, 2009, pp, 146-147  
Wightman, August 15, 1996, p. 68  
Wightman, March 10, 2010, p. 74, PW-1053-18 seq. pp. 205, 219, PW-1053-25 seq. pp. 53-54, 120,  
PW-1053-28 seq. pp. 45, 71  
2454  
2455  
2456  
2457  
PW-1053-23, seq. pp. 106-115, Wightman, February 9, 2010, p. 53  
PW-2400-87  
Wightman, June 20, 1996, p. 57  
PW-1053-23, seq. p. 83  
500-05-001686-946  
PAGE: 461  
[
2232] Wightman advised Castor with respect to this investment and billed Castor for  
2458  
.
advice and consideration in connection with Cafa Financial  
Ouimet Hubbs  
[
2233] Wightman introduced Stolzenberg to an investment in a brokerage firm called  
2459  
Ouimet Hubbs . This investment was presented to Stolzenberg, who determined that  
2
460  
the investment should be taken up by Castor, rather than by him personally  
2234] Castor acquired a 20% interest in the common shares and a 40% interest in the  
.
[
preferred shares of Ouimet Hubbs parent company, 1561159, for a total investment of  
760,0002 . Both the parent and subsidiary were auditing clients of Wightman  
2462  
.
461  
$
[
2235] Castor ended up having to take significant write-downs on this investment2463  
.
Orion Maritime Inc.  
[
2236] Wightman introduced Stolzenberg to Orion Maritime, a venture in which Castor  
invested $500,000 in 1987.  
[
2237] Wightman was involved in this project because he had agreed to take care of the  
2464  
.
financing arrangements for its principal, Baillargeon  
[
2238] While Orion was not an audit client of Wightman, it would likely have become  
2465  
.
one had the deal gone through  
[
2239] The project was not successful, and Castor wrote-off $653,400 in principal and  
2
466  
.
$
34,963 in interest as a bad debt at year end in 1988  
[
2240] In the end, Stolzenberg viewed the loss that had to be taken on this project as  
2
467  
.
“
the cost of doing business” with Wightman  
Brandywine & Iotech Corporation  
2458  
2459  
2460  
2461  
2462  
2463  
2464  
2465  
2466  
2467  
PW-2372-25  
Wightman, September 5, 1995, p. 57  
Wightman, June 25, 1996, pp. 149-150  
PW-2400-92, PW-1053-23, seq. p. 89  
Wightman, February 9, 2010, p. 57, PW-1053-23, seq. pp. 93-103  
PW-1053-15, seq. pp. 345-346  
Wightman, February 9, 2010, p. 71  
Wightman, February 9, 2010, p. 78  
PW-1053-23, seq. p. 130  
Ron Smith, May 14, 2008, p. 113  
500-05-001686-946  
PAGE: 462  
[
2241] Wightman introduced Castor to two transactions (identical in structure) that he  
designed to enable his clients, Mr. and Mrs. Reiss, to reduce the income tax payable  
2
468  
.
from their ventures at the Vancouver exposition  
[
2242] The first was effected by Castor loaning $35 million to a numbered corporation  
141999), which in turn acquired shares in Brandywine, which in turn deposited back the  
35 million with Castor.  
(
$
[
2243] The second was effected by Castor loaning $60 million to Munich Fest House  
and Beergarten Reiss, which in turn acquired shares of Iotech (which was also  
2
469  
Wightman’s auditing client) , which in turn deposited the same amount with Castor for  
the term of the loan2  
470  
.
[
2244] While Castor earned a $10,000 fee on the closing of each of these transactions,  
2471 2472  
on the “loan” , these transactions  
as well as ½% of interest due to the spread  
served no commercial purpose, and were designed solely so that the Reiss family could  
save money.  
[
2245] At trial, Wightman tried to distance himself from Brandywine2473. However, he  
designed the transaction, and introduced all of the parties involved to Castor.  
Potential Coat-Hangers (Laurentian Group, JT/Guardian and Sensormatic)  
[
2246] Wightman initiated several companies to potentially use Castor’s facilities in  
2474  
.
Ireland to establish “coat-hanger” companies for tax saving purposes  
Chur, Petra and Sloppin  
2
475  
with the opportunity to invest  
[
2247] Wightman approached Stolzenberg and Castor  
2
476  
in an offshore  
with a number of his friends, acquaintances and C&L partners,  
investment fund company.2  
477  
2
2
2
2
2
2
2
2
468  
469  
470  
471  
472  
473  
474  
475  
Wightman, February 9, 2010, p. 82  
Wightman, February 9, 2010, pp. 83-84  
PW-2460, Simon, May 1, 2009, pp. 177-179  
Simon, May 1, 2009, p. 180  
PW-2460  
Wightman, February 9, 2010, pp. 82-83  
PW-2470 and PW-2470-1, PW-2469-1  
PW-2462: Memo dated February 11, 1983 from Simon to Stolzenberg. «E. Wightman advises that  
they too are proceeding, albeit slowly on the offshore fund. He was pleased to hear that you are  
interested to pursue the idea as outlined in his memo to you.»; PW-2400-61: «Mr. Wightman  
summarized a proposal in virtue of which the Company could join with others in establishing an  
offshore company, probably in Bermuda, which could be of significant advantage to senior officers  
and employees of the Company; it was agreed in principle that management should proceed with  
such a proposal.»  
2476  
Wightman, February 8, 2010, pp. 191-193.  
500-05-001686-946  
PAGE: 463  
[
2248] Sloppin was an offshore corporation incorporated in the Bahamas. Chur and  
Petra were the shareholders of Sloppin. Sloppin was owned by its investors through  
their ownership of shares in Petra and Chur, whose sole assets were their shares in  
Sloppin2  
478  
.
[
2249] The corporations provided tax benefits to Canadian investors under Bahamian  
and Canadian fiscal laws.  
[
2250] Castor invested in $200,000 of Petra’s preferred shares, half of which was held  
2479  
by CHIF, and the other half, by Stolzenberg personally . The common shares were  
2
480  
2481  
and Stolzenberg .  
distributed equally among Castor’s senior management  
[
2251] Wightman’s wife’, Ruth Wightman, invested CDN $125 000 – she owned around  
2482  
0% of the shares of Chur . In 1985, when Chur was wounded-up, Mrs. Wightman  
2483  
.
1
became a shareholder in Petra  
[
2252] Wightman wanted to set up Sloppin in such a fashion that it would not be taxable  
in Canada. It was necessary for Sloppin to have its headquarters and management  
outside of Canada. It was also necessary that the actual decision making of the  
2
484  
company be done outside of Canada.  
[
2253] Wightman called in Bahamian partners, from C&L Bahamas. One of them was  
Johnson, the company’s director in the Bahamas. Johnson relied exclusively on  
Wightman’s advice and due diligence when approving the company’s investments, and  
2
485  
.
he could not recall a single instance where he rejected a proposal by Wightman  
[
2254] In spite of appearances, Wightman was, in every way, the directing mind of  
Sloppin.  
•
•
He conceived of the operation.2486  
He instructed C&L Bahamas to incorporate the companies.2487  
2
477  
478  
PW-347; PW-362; Wightman, February 8, 2010, pp. 186-187  
Wightman, June 25, 1996, p. 80: “(…) and between CHUR and PETRA they at that time owned a  
hundred percent (100%) of SLOPPIN”.  
2
2479  
2480  
2481  
PW-345, PW-350H, PW-350N.  
Wightman, February 8, 2010, pp. 191-192, PW-345, PW-350H.  
PW-350O (shows shares registered to “bearer”, Stolzenberg’s name appears to have been removed),  
PW-353O, PW-354O, PW-355O, PW-345 (financial statements confirming that Stolzenberg has 100  
common shares and 100,000 preferred shares).  
2482  
2483  
2484  
2485  
2486  
2487  
Wightman, February 8, 2010, p. 191-192.  
Wightman, February 8, 2010, pp. 193-194.  
Wightman, February 8, 2010, pp.185-192  
Johnson, October 27, 1998, p. 146.  
Johnson, October 27, 1998, pp. 63-64.  
Wightman, September 5, 1995, p. 192.  
500-05-001686-946  
PAGE: 464  
•
•
•
•
•
He introduced all shareholders.2488  
He located all investment opportunities.2489  
He negotiated the investments.2490  
He did the accounting work for the company.2491  
He prepared and sent financial statements to the shareholders.2492  
[
2255] Wightman was in total control of every single investment decision made by  
Sloppin, and he used this authority to make investments, which were beneficial to  
Castor or Stolzenberg, and at times, upon their instructions or request.  
[
2256] When CHIF subscribed for its $200,000 of shares in Petra, Sloppin placed  
roughly $700,000 on deposit with CHIF. This short-term deposit, made on Wightman’s  
suggestion, included a surplus of funds from the initial share subscription, and remained  
2
493  
.
on deposit with CHIF until another suitable investment was brought forward  
[
2257] The money was withdrawn on September 20, 1985, with interest, in the amount  
2494  
.
of $737,890.70  
[
2258] Wightman admitted that one of the reasons he suggested the deposit remain  
2495  
.
with CHIF was because “Stolzenberg requested it  
[
2259] Wightman did not disclose to Johnson that CHIF was an audit client when he  
2496  
.
directed Johnson to make the investment  
1
21 Baxter Street  
[
2260] Wightman put together a group of investors to acquire a 50% interest in this  
2497  
.
condominium project in New York City organized by his friend, Sant Singh Chatwal  
2
2
2
2
2
488  
489  
490  
491  
492  
Johnson, October 28, 1998, pp. 207-208.  
Johnson, October 27, 1998, p. 68; Wightman June 20, 1996, p. 127.  
Ex: Re Perkins Paper loan: Wightman, September 6, 1995, p. 17.  
Johnson, October 27, 1998, p. 67.  
Wightman, February 25, 2010, p. 23; PW-353-1; PW-354; PW-354I (PW-354 A through to Y are the  
letters sent to all shareholders for that year); PW-355; PW-355I (PW-355 A through to Z are letters  
sent to all shareholders for that year); PW-356: PW-351J (PW-351 A through to Z are the letters sent  
to all shareholders for that year); PW-356-1 (Petra); PW-368-1 (Sloppin): Draft 1990 financial  
statements with Wightman’s notes on them  
2493  
2494  
2495  
2496  
Johnson, October 27, 1998, p. 76.  
PW-2535.  
Wightman, June 20, 1996, pp. 139-143.  
Johnson, October 27, 1998, pp. 76-77. and Wightman, June 20, 1996, pp.141-142 testimony that he  
did not know whether or not he disclosed that information to Johnson and that in his views this was  
not important  
500-05-001686-946  
PAGE: 465  
2
498  
(using funds advanced  
[
2261] Stolzenberg acquired a 40% interest in the venture  
2
499  
2500  
2501  
and Rodney ,  
from CHIF ). The other investors were Wightman’s clients, Reiss  
and the following Petra’s shareholders: Robertson, the Allsop, Pechet and his wife, and  
2
502  
Ruth Wightman . Part of Ruth Wightman’s contribution was drawn from the  
2
503  
Wightman’s joint account by way of a cheque signed by Wightman . Each acquired a  
2
504  
1
0% interest in the project  
.
[
2262] Sloppin loaned $280,000 with respect to this project2505, which Johnson (partner  
2506  
but  
of C&L Bahamas and director of Sloppin) understood to be a loan to the project,  
which in fact was a loan to certain members of Wightman’s investment group, namely  
2
507  
.
Stolzenberg, Mrs. Wightman, Robertson and the Allsop  
2263] This investment was held by Bänziger through a nominee company, Ceru-  
[
2
508  
2509  
Wecua , whose directors were Stolzenberg, Gambazzi and Bänziger .  
[
2264] Wightman was involved in the project as a quasi-manager of the group, and a  
2510  
liaison between this group and the project’s principal . He kept all of them up to date  
on the progress of the project, and prepared and sent them financial projections with  
respect to the project.  
[
2265] When the investment was repaid, Wightman also worked out the distribution of  
2511  
which were deposited in CHIF until all of the instalments were received by  
proceeds,  
2
512  
Ceru-Wecua . As appears from the scheme of distribution, CHIF obtained three new  
2
513  
.
depositors from this transaction on Wightman’s instructions  
CMF  
2
2
2
2
2
2
2
2
2
2
2
2
2
2
497  
498  
499  
500  
501  
502  
503  
504  
505  
506  
507  
508  
509  
510  
Wightman, February 9, 2010, pp. 16-17.  
Wightman, February 9, 2010, p. 19  
PW-2523.  
Wightman, February 9, 2010, pp. 20-25.  
PW-1134 bates 2450.  
PW-345 (shows they are shareholders).  
PW-2520; PW-2521.  
PW-2521 (shows they are investors in the project).  
PW-358: Note: on PW-622 series, the loan from Sloppin is shown as only $200,000.  
Johnson, October 28, 1998, pp.232 and following  
PW-644.  
PW-643  
PW-2525.  
Wightman, September 5, 1995, p. 145: «Q: And you were the one through whom all the  
communications were taking place? A: That's correct.»  
PW-2524; PW-2543; PW-622-1; PW-622-2; PW-622-3; PW-622-4; PW-622-5; PW-622-6; PW-644.  
Wightman, December 11, 1996, pp. 147-148.  
2511  
2512  
2513  
PW-2521 (Bänziger confirmation); PW-644 (Wightman instructions).  
500-05-001686-946  
PAGE: 466  
[
2266] Ruth Wightman, Wightman’s wife, was a shareholder of 160883, which owned  
2
514  
.
7
,500 shares of CMF on behalf of the Canadian investors in the venture  
2515  
2267] Wightman asked Stolzenberg to participate in this investment , which he did,  
2516  
.
[
by purchasing 750 shares in the company and by becoming one of its directors  
[
2268] Other interested persons in this company included Petra shareholders like  
Robertson (through his company, Robertson Financial Services) and Cope (through his  
2
517  
.
company Nicophil Investments) and Sloppin’s’ borrower, Ryan Plastics  
2269] Wightman was in complete control of CMF:  
[
•
•
•
•
He instructed C&L Cyprus to incorporate the company for him in Cyprus.2518  
He gave the Cypriot directors all of their instructions.2519  
He approved the Cypriot directors’ invoices for professional services.2520  
He was a signing officer with the authority to manage the company’s  
2
521  
Canadian bank accounts.  
•
•
•
He produced the draft financial statements.2522  
At his initiative, C&L Cyprus were appointed auditors of the company.2523  
Share in the distribution was paid back by CMF to CHIF by way of a cheque  
2
524  
signed by Wightman.  
Expo Overseas  
[
2270] Expo Overseas Management is another business relationship that Wightman  
entered into with Castor.  
2
525  
whereby Castor Finanz  
[
2271] Wightman organized this back-to-back transaction  
and CHIF were used to assist Reiss, a Wightman client, to ‘avoid’ taxes while financing  
2514  
2515  
2516  
2517  
2518  
2519  
2520  
2521  
2522  
2523  
2524  
2525  
PW-940 and PW-970.  
Wightman, September 6, 1995, p. 25.  
PW-940  
PW-970  
Wightman, September 6, 1995, p. 26.  
See PW-952, PW-964 as examples of such instructions  
PW-980: Example of an invoice from C&L Cyprus sent to Wightman for approval.  
PW-982.  
PW-985  
PW-940  
PW-2536 PW-2249  
PW-388.  
500-05-001686-946  
PAGE: 467  
2
526  
various restaurants at Expo 88 in Australia . The operation was funded primarily by  
2
527  
2528  
Reiss. However, Sloppin  
and Wightman , alleging that he advanced money for a  
2
529  
friend , also contributed.  
[
2272] The transaction was structured so that the investors could deposit funds with  
CHIF, and in turn, equivalent funds were disbursed from Castor Finanz to the  
operations in Australia2  
530  
.
2
531  
[
2273] Wightman proposed using Castor’s facilities for these transactions , and  
2
532  
.
communicated with Bänziger with respect to the operation of the account for Reiss  
2
533  
[
2274] At the end of the project, and in consultation with Wightman , the Expo  
Overseas account at CHIF was converted into a personal in trust account for Reiss, the  
2
534  
.
statements of which were sent to Wightman  
Investments of Sloppin’s money: Pigments & Chemical, Compagnie de Recyclage de  
Montréal, Perkins Paper and Ideal Metals  
[
2275] The internal staff at Castor, be it O’Connor or Monica Bertele, the secretary of  
Stolzenberg, referred to Pigments & Chemical, Compagnie de Recyclage de Montréal,  
2
535  
.
Perkins Paper and Ideal Metals as the “Elliot Wightman Companies”  
[
2276] Stolzenberg’s acquisition of his interests in these companies was financed for the  
2536  
.
most part by Castor  
Pigm en t & Ch em ica l  
[
[
2277] Pigments & Chemical was Wightman’s audit client2537  
2278] In 1989, Sloppin loaned $750,000 to Pigments & Chemical . The loan was  
.
2
538  
approved and disbursed on April 10, 1989, even though Johnson only obtained the  
2
2
2
2
2
2
2
2
2
2
2
526  
527  
528  
529  
530  
531  
532  
533  
534  
535  
536  
PW-1012  
Johnson, October 28, 1998, p. 259-260.  
PW-2518; Wightman September 5, 1995, pp. 112-115.  
Wightman, February 9, 2010, pp. 48-49.  
PW-2629, PW-2639, PW-2631.  
Wightman, February 9, 2010, pp. 49-50.  
PW-2635, PW-2637, PW-2638.  
PW-2639  
PW-2652.  
O’Connor, January 15, 2009 (p.m.), p. 35.  
Pigment & Chemicals: O’Connor, January 14, 2009, pp. 205-212; PW-668-3A; PW-668-3B,  
Compagnie de Recyclage: O’Connor, January 14, 2009, pp. 164-171; PW-668-7A, PW-668-7B. PW-  
6
6
6
68-7B1, Perkins Paper: O’Connor, January 14, 2009, pp. 187-190; PW-668-2A, PW-668-2B, PW-  
68-2C, Ideal Metals: O’Connor, January 14, 2009, pp 224-237; PW-668-11A, PW-668-11C, PW-  
68-11E (WOST Holdings) and PW-668-13A, PW-668-13B, PW-668-13E (WOST Development).  
2537  
PW-662-4, PW-662-1  
500-05-001686-946 PAGE: 468  
documentation on April 24, 1989 and signed the relevant paper work on May 5,  
9892  
539  
.
1
2
540  
and  
[
2279] Stolzenberg was involved in Pigment & Chemicals as a director  
2
541  
shareholder, and invested $855,999.60 in shares of 156370 , which owned 100% of  
the shares of Pigments & Chemical.  
[
2280] Cafa was also a shareholder2542  
.
Com p a gn ie d e Recycla ge d e Mon t r éa l  
[
2281] Sloppin loaned $500,000 to La Compagnie de Recyclage de Montréal2543 as  
part of the initial financing to enable a group of investors put together by Wightman and  
Berkowitz, also of C&L2 , to purchase the company in January 1989  
2545  
.
544  
2
546  
and  
[
2282] Stolzenberg was one of these initial investors, who invested $400,000  
2
547  
obtained a 25% interest in the company . In July 1989, Stolzenberg further injected  
2
548  
,
$
122,500 into the operation by way of a loan and a subscription of preferred shares  
2
549  
.
but he did not reinvest when asked in 1990  
[
[
2283] Sloppin was never repaid.2550  
2284] In a memo to Stolzenberg, Bertele, Castor’s bookkeeper, wrote: «He is very well  
aware of the fact that you invested monies in his company just because of Mr. Elliot  
Wightman, however, as the deal is now closed and you have invested money in his  
2
551  
company he wanted to thank you for your confidence.»  
Per k in s Pa p er  
[
2285] Perkins Paper was an audit client of Wightman2552  
.
2538  
2539  
2540  
2541  
2542  
2543  
2544  
2545  
2546  
2547  
2548  
2549  
2550  
2551  
2552  
PW-358  
PW-377A  
PW-662-3  
PW-663-1  
PW-662 (series)  
PW-358  
PW-664-3  
PW-664-3  
PW-668-7A  
PW-664-7  
PW-664-12  
PW-664-15  
PW-353  
PW-664-5  
Wightman, September 5, 1995, p. 68  
500-05-001686-946  
PAGE: 469  
[
2286] Sloppin loaned $500,000 to Perkins Paper in 1983, for a period of 10 years. The  
2553  
.
loan was repaid with a penalty in 1984  
[
2287] The Allsop and Robertson, who were shareholders of Perkins Paper, were also  
2554  
.
shareholders of Petra  
[
2288] Wightman introduced Stolzenberg to this company, and was instrumental in  
designing the transaction so that Stolzenberg would become a significant shareholder  
2
555  
by investing $17,382,750 in 1989 . Half of this acquisition was financed by a loan  
originally from CHIF, which indirectly became a loan to Stolzenberg’s numbered  
2
556  
.
company from Global Management, who in turn became the borrower from CHIF  
Id ea l Met a ls  
[
[
2289] Ideal Metals was an audit client of Wightman2557  
.
2290] Sloppin invested in Ideal Metals by acquiring 2000 shares of the company on  
September 16, 1986. The other shareholders in this venture were fellow Petra investors  
and Wightman friends such as Cope (through Marcol Holdings) and Robertson (through  
2
558  
.
Robertson Financial Services)  
[
2291] Stolzenberg acquired an interest in this company by purchasing 49% of 147097,  
2559 2560  
.
which owned shares in 146670 , which owned 64% of the shares of Ideal Metals  
Stolzenberg was a director of both of these numbered companies, which were also  
Wightman’s audit clients2  
561  
.
[
2292] Wightman assisted Stolzenberg in acquiring shares of Ideal Metals on the market  
by arranging that purchases be made in trust by an employee of C&L named  
2
562  
Duranleau . Wightman set up this arrangement and gave Duranleau the initial  
instructions to purchase shares for Stolzenberg at the initial purchase price of $2.00-  
$
2.50. Through this arrangement, Stolzenberg acquired an additional 324,400 common  
2563  
.
shares of Ideal Metals for $1,033,931.76  
2553  
2554  
2555  
2556  
2557  
2558  
2559  
2560  
2561  
2562  
2563  
PW-358  
PW-567-26  
PW-567-20  
O’Connor, January 14, 2009, pp. 187-190; PW-668-2A, PW-668-2B, PW-668-2C  
PW-570-19  
PW-570-6  
PW-570-28  
PW-570-17  
PW-570-6, PW-570-28  
PW-2512, PW-2513  
PW-668-13E  
500-05-001686-946  
PAGE: 470  
Credibility and reliability  
[
2293] At trial, Wightman tried to “improve” this portion of his testimony.  
• Example # 1 (disclosure of investments to C&L partners)  
o At discovery, in 1995 and 1996, he could not remember whether or not he  
2
564  
disclosed certain investments, like CMF . He was not even aware that  
he was required to disclose his investments in private companies in his  
2
565  
annual declaration  
o At trial, in 2010, he claimed he did consider the C&L Policy carefully,  
specifically provision 16 (a), and concluded that due to the size of the  
investments or the control or influence exerted over the projects,  
disclosure of these investments was not required2566  
.
•
Example # 2 (Sloppin’s deposit of 700 000$ with CHIF)  
o At discovery, on September 5, 1995, Wightman could not recall any  
2
567  
.
circumstances for the deposit  
o At discovery, nine months later, on June 20, 1996, Wightman remembered  
having advised Johnson to deposit a surplus of funds with Castor because  
2
568  
.
Stolzenberg had requested it  
o At trial, fourteen years later, on February 9, 2010, Wightman claimed that  
Simon had requested that the surplus of funds be loaned to Castor and  
that he had communicated the terms of the deposit to Johnson on Simon’s  
2
569  
whereas Simon testified that, other than physically repaying the  
behalf,  
deposit, he had no knowledge and remembered no discussions about the  
transaction2 - the Court believes Simon’s version of the facts.  
570  
•
Example # 3 – (Castor’s investment in Orion Maritime)  
2564  
2565  
2566  
2567  
2568  
2569  
2570  
Wightman, August 15, 1996, pp. 77-78  
Wightman, September 5, 1995, 160-162  
Wightman, February 9, 2010, pp. 41-43  
Wightman, September 5, 1995, pp. 210-211  
Wightman, June 20, 1996, pp. 139-143  
Wightman, February 9, 2010, pp. 10-12  
Simon, May 1, 2009, pp. 231-234, June 17, 2009, pp. 131-133  
500-05-001686-946  
PAGE: 471  
o At discovery, on June 25, 1996, Wightman was certain that the deal was  
presented to Stolzenberg in a non-specific way, and that Stolzenberg, not  
2
571  
him, had decided to give this venture to Castor.  
o At trial, in 2010, Wightman recounted in great detail that he introduced this  
deal to Castor, and cited many reasons, including Castor’s knowledge of  
the hotel industry and Luerrsen’s knowledge of the shipping industry as to  
why he thought that Castor might be interested in participating.2572  
[
2294] Wightman minimized his role or refused to admit certain facts until he was  
confronted with evidence that he could not discard.  
•
Example # 1 : preparation and sending of financial statements for Petra  
o At trial, in examination in chief, on February 9, 2010, Wightman minimized  
his role with Chur, Petra and Sloppin:  
!
The only thing that I did was I, from time to time, introduced new  
shareholders or advised them that some shareholders wished to  
withdraw. I, from time to time, suggested that they consider some  
investment deals, and I also did some accounting work for  
Sloppin, which annually I would send to Mr. Johnson for him to  
2
573  
incorporate and to produce the final financial statements.  
(emphasis added)  
o At trial, in cross-examination, on February 25, 2010, confronted with the  
2
574  
content of various exhibits , Wightman had no choice but to admit that  
his involvement went beyond that which he had previously testified to –  
2
575  
.
that he had sent financial statements  
2
2
2
2
571  
572  
573  
574  
Wightman, June 25, 1996, pp.151-152  
Wightman, February 9, 2010, pp. 71-77  
Wightman, February 9, 2010, p. 8.and Wightman, February 25, 2010, p. 23  
PW-353-1: Letter from Wightman to Johnson stating that they the 1987 financial statements are being  
sent to shareholders “over” Johnson’s name; PW-353I: Letter enclosing the1987 Financial  
Statements of Petra sent to Simon c/o Stolzenberg (PW-353 A through to Y are letters sent to all  
shareholders for that year); PW-354: Letter from Wightman to Johnson stating that they the 1988  
financial statements are being sent to shareholders “over” Johnson’s name; PW-354I: Letter  
enclosing the1988 Financial Statements of Petra sent to Simon c/o Stolzenberg (PW-354 A through  
to Y are the letters sent to all shareholders for that year); PW-355: Letter from Wightman to Johnson  
stating that they the 1989 financial statements are being sent to shareholders “over” Johnson’s name;  
PW-355I: Letter enclosing the1989 Financial Statements of Petra sent to Simon c/o Stolzenberg (PW-  
3
55 A through to Z are letters sent to all shareholders for that year); PW-356: Letter from Wightman  
to Johnson stating that they the 1990 financial statements are being sent to shareholders “over”  
Johnson’s name; PW-351J: Letter enclosing the1990 Financial Statements of Petra sent to Simon c/o  
Stolzenberg (PW-351 A through to Z are the letters sent to all shareholders for that year); PW-356-1  
(
Petra); PW-368-1 (Sloppin): Draft 1990 financial statements with Wightman’s notes on them  
2575  
Wightman, February 25, 2010, p. 23  
500-05-001686-946  
PAGE: 472  
•
Example # 2 – Baxter Street –preparation of financial projection  
o At trial, in examination in chief, on February 9, 2010, Wightman claimed  
that:  
!
he was not involved at all with Stolzenberg’s decision to invest,  
apart from introducing the project; and  
!
all information had been provided by his friend Chatwal2576  
o At trial, in cross-examination, on February 11, 2010, Wightman was  
confronted with a document that he had himself prepared and had  
remitted to his group of investors including, namely, Stolzenberg and had  
sent to Bänziger2  
577  
.
[
2295] Wightman denied being aware of certain things or being involved in certain  
arrangements. The Court does not believe him.  
•
•
Example # 1 – knowledge of Stolzenberg being a director of CMF  
o Wightman claimed he did not know that Stolzenberg was a director of  
CFM and that he learned about that through discovery (it came as a  
2
578  
complete surprise to him).  
o Notes of a meeting attended by Wightman concerning CMF indicate that  
2
579  
Stolzenberg was one of the directors for the company.  
Example # 2 – Stolzenberg’s investment in Perkins Paper -source of  
financing  
o Wightman claimed that he did not put his mind to the issue of the source  
of the financing2  
580  
;
2576  
2577  
2578  
2579  
2580  
Wightman, February 9, 2010, pp. 17-19  
Wightman, February 11, 2010, pp. 87-92; PW-2524 and PW-3097  
Wightman, February 9, 2010, p. 38  
PW-951  
Wightman, June 25, 1996, pp. 139-141  
500-05-001686-946 PAGE: 473  
2
581  
and he  
o Wightman was deeply involved in the details of this transaction,  
2
582  
.
raised the question of financing  
•
Example # 3 – arrangement to help Stolzenberg buy shares of Ideal Metals  
o Wightman claimed that he only introduced Stolzenberg to Mrs. Duranleau  
2
583  
of C&L, and he denied having anything to do with instructions.  
o Exhibits PW-2512 and PW-2513 show otherwise.  
Conclusions  
[
2296] As C&L knew, a purpose of its engagement to audit Castor was to add credibility  
2584  
to the financial statements of Castor . Clients and people associated with them rely  
on auditors because they believe in the auditors’ professional integrity, independence,  
and objectivity.  
[
[
2297] Objectivity is a fundamental tenet of auditing.  
2298] At all relevant time, Wightman had to have an objective state of mind:2585 he did  
not.  
[
2299] Objectivity imposes the obligation to be impartial, intellectually honest, and free  
of conflicts of interests. Independence enhances the auditor’s ability to act with integrity  
and objectivity. Independence is a question of fact.  
[
2300] Wightman had a double responsibility :  
•
to avoid actual impairment of objectivity – to avoid actual impairment of  
willingness to recognize and confront the facts regardless of consequence;  
and  
2
2
2
2
581  
582  
583  
584  
PW-567-20, PW-567-25  
PW-567-24  
February 9, 2010, Page 64  
PW-1420, tab 2 – C&L Technical Policy Statement (“TPS”) - Accounting & Auditing (TPS-A-104),  
entitled “Professional Independence” on October 15, 1977 and a revised version on October 5, 1988  
–
Introduction – section 2  
2585  
PW-1419-1A, Section 5000.02 (1988); PW-1419-2A, Section 5000.02 (1989); PW-1491-3A, Section  
000.02 (1990)  
5
500-05-001686-946  
PAGE: 474  
•
to avoid perceived impairment of objectivity - to avoid perceived impairment of  
willingness to recognize and confront the facts regardless of consequence  
2
586  
.
[
2301] Any of the following interactions an auditor has with an audit client or with  
persons associated with an audit client in decision-making capacities (chief executive  
and financial officers, directors, substantial shareholders and other senior persons in a  
position to influence the client or the way the client manages his affairs) can impair the  
auditor’s objectivity or the auditor’s willingness to recognize and confront the facts  
regardless of consequence:  
•
•
•
Borrowing money from;  
Lending money to; or  
Engaging in any other business relationships (participation in joint business  
ventures and limited partnerships, lease arrangements, sales of items and  
other business transactions related to the supplying of professional services).  
[
2302] It is of no surprise that all of the above is prohibited by C&L in its technical policy  
2587  
.
entitled “Professional Independence”  
[
2303] Wightman, in respect of his engagement to express an opinion on Castor’s  
financial statements in 1988, 1989 and 1990, had to hold himself free of any influence,  
interest or relationship that could impair or would impair or would be perceived as  
2
588  
.
capable of impairing his professional judgment or objectivity  
[
2304] While it was not unusual for professional accountants to introduce investments  
2589  
and  
opportunities to and between clients and to refer business to clients, as Froese  
2
590  
acknowledged, it remains that such activities could only be legally done if they  
Levi  
had no impact on the objectivity of the auditor.  
[
2305] As the summary of evidence in previous paragraphs of the present judgment  
indicates, Wightman interacted with Castor and Stolzenberg in the various ways  
described above and on numerous occasions.  
2
586  
587  
PW-1421-2: R. J. Anderson, F.C.A., “The External Audit”, second edition, published in 1984, pages  
5
3 to 58 section entitled “Objectivity”  
2
PW-1420, tab 2 – C&L Technical Policy Statement (“TPS”) - Accounting & Auditing (TPS-A-104),  
entitled “Professional Independence” on October 15, 1977 and a revised version on October 5, 1988  
Sections 3.02.01, 3.02.05 and 3.02.06 of the Quebec Code of Ethics of Chartered Accountants  
Froese, December 8, 2008, pages 156 to 158  
2588  
2589  
2590  
Levi, February 2, 2010, pages 52-53  
500-05-001686-946  
PAGE: 475  
[
2306] Wightman’s professional judgment was impaired and caused him to approach  
the audits without exercising objectivity or independence. Conclusive proof of such  
impairment includes his casual attitude towards the work performed by his audit teams,  
which demonstrates carelessness, his absence of skepticism in his dealings with  
Stolzenberg, his superficial wrap-up meetings which, in fact, never probed any  
transaction to the bottom, and his blindness to numerous “red flags” or suspicious  
circumstances.2  
591  
[
2307] The fact that he hid these numerous relationships from his partners in his annual  
2592  
declarations , and to his partner Johnson in the context of their relationship for  
Sloppin, suggests that he knew or felt that he had something to hide. Moreover, his  
changing or “improved” testimonies on these issues point in the same direction.  
I nappropriate planning  
[2308] The Handbook defines “planning” as follows:  
Audit planning consists of developing a general strategy and a detailed approach  
for the expected nature, extent and timing of the examination. Analytical  
procedures would assist the auditor in developing a general strategy and a  
detailed approach (see AUDIT EVIDENCE, paragraph 5300.31). Plans may need  
to be changed as the audit progresses.  
Matters which the auditor needs to consider when planning his examination  
include:  
(
(
a) the terms of the engagement and the expected date of his report;  
b) the nature of the client’s business including applicable statutory and  
contractual requirements;  
(
(
c) the experience gained during the previous audit engagements;  
d) the accounting policies and the degree of complexity of the accounting  
systems;  
(
(
(
(
e) materiality and the components of audit risk;  
f) any involvement of other auditors;  
g) any involvement of internal auditors and persons having special expertise;  
h) the intended reliance on internal controls;  
2
591  
592  
For a list of some of those red flags, see Froese, January 27, 2009, pp. 58-64  
PW-2527.  
2
500-05-001686-946  
PAGE: 476  
(
i) the level of experience and number of any assistants to be assigned to the  
engagement, and, and  
(
j) the date the procedures are to be performed taking into account the availability  
of audit evidence to be obtained and the effectiveness of performing such  
2593  
procedures at that date.  
[
2309] C&L technical material also includes information and instructions relating to  
planning:  
1
6. Auditors must plan their examination in the knowledge that the financial  
statements could be materially misstated because of fraud and the nature, extent  
and timing of audit procedures should be designed to detect material  
misstatements from this cause.2  
594  
[
2310] In order to determine its audit plan and audit procedures, an auditor has to  
understand the nature of his client’s business. If the nature of that business evolves, the  
auditor has to determine if the audit plan and resultant audit procedures need to be  
modified.2  
595  
[
2311] For the 1988, 1989 and 1990 audits, it was imperative that C&L understand the  
2596  
.
true nature of Castor’s business to select appropriately the audit strategy  
[
2312] Castor held itself out to be a short-term lender. In its marketing materials, Castor  
described its business as focused «on short and medium term loans in the North  
2
597  
In fact, as the nature of Castor’s business progressed  
American mortgage market».  
during the 80s, Castor slipped farther and farther away from being a short-term lender.  
[
2313] From a short-term lender, Castor became a long-term lender, accepting primarily  
unsecured high risk. This was not hidden from the auditors, but C&L ignored that  
change in the nature of their client’s business and failed to implement an audit plan that  
was appropriate in the circumstances.  
[
2314] C&L failed to alter their auditing approach of project loans secured by real estate  
and to adjust it to corporate borrowings, which is wholly dependent on the capacity of  
the borrower to pay. C&L audited unsecured relationship loans (corporate borrowings)  
2
598  
.
the same way they audited mortgage loans secured by real estate  
2
593  
PW-1419-1A, sections 5150.05 and 5150.06 (1988); PW-1419-2A, sections 5150.05 and 5150.06  
(
1989); PW-1419-3A, sections 5150.05 and 5150.06 (1990)  
PW-1420, TPS-A-101 “Professional Responsibilities and Conduct” - revised August 31, 1988.  
PW-3034, p. 9  
2594  
2595  
2596  
2597  
2598  
PW-3034, pp. 11-20  
PW-1057-1, (June 1988); PW-1057-2 (April 1989); PW-1057-3 (April 1990)  
PW-2908, Vol. 2, F-12; PW-2941, Vol. 3, pp. 12-14  
500-05-001686-946  
PAGE: 477  
[
2315] The planning failed to differentiate among the different types of loans and to  
specify audit procedures for each different type. For example, the planning for auditing  
the carrying value of a mortgage loan ought to have been very different from the  
planning for an unsecured loan which would differ from a loan secured by a pledge of  
shares, which would differ from a loan supported by a personal or corporate guarantee.  
[
2316] Furthermore, for each type of loan, the planning ought to have focused on the  
loan which had the greatest risk to Castor. For example, it is inexplicable that the  
auditors would have reviewed the carrying value of a first ranking mortgage loan on the  
CSH and not considered the lower ranking mortgage or equity loans related to the same  
project.  
[
2317] The planning was performed in an automatic, thoughtless manner without  
professional judgment or serious consideration of anything other than going through the  
motions of mindlessly filling out forms.  
[
2318] The planning did not include instructing the staff on how to perform audit  
procedures. For example, in addressing the procedure as to whether interest had been  
paid or capitalized, there was no explanation as to how interest charged to account 046  
was to be treated.  
[
2319] In determining whether repayment terms were being met, the almost universal  
failure of Castor’s borrowers to comply with contractual obligations was not addressed.  
2
599  
each year, a  
Although C&L requested that Castor prepare year-end working papers  
review of the information that C&L requested discloses that no attempt was made to  
have Castor provide them with financial information on borrowers, loan to value and  
other applicable financial ratios, credit approval and monitoring assessments,  
compliance by borrowers with covenants, details of revenue received in cash, and all of  
the other types of typical information that one would expect a diligent lender to retain in  
its loan files.  
[
2320] The audit was not planned to give the auditors enough time to complete the  
audit. This was particularly problematic given the lack of experience of the audit staff  
assigned to the more complicated aspects of the portfolio and the absence of staff  
continuity. The work should have begun prior to the year end and should have been  
completed following the year end in order to allow sufficient time for the complex work to  
be completed. The need for additional time was recognized during the 1990 wrap-up  
meeting when Wightman arranged with Stolzenberg for pre-audit work to be performed  
on the loan portfolio in future audits so that the staff could have sufficient time to  
complete their work. This procedure should have been put into effect earlier, for the  
1
988, 1989 and 1990 audits.  
2599  
For example, D-29-1; Tooke, February 27, 2008, pp. 91-97.  
500-05-001686-946  
PAGE: 478  
2
600  
to act as the supervisor of the  
[
2321] In 1990, Hunt was recruited at the last minute  
CHL audit. He had never worked on Castor’s audit. He had never worked on any similar  
client’s audit. He had no experience with the real estate business or with the lending  
2
601  
He did not know Wightman and had never met him. He did not know  
business.  
2
602  
Quintal either. He had no knowledge of Castor’s affairs.  
He came from Nova Scotia  
603  
He did not know the staff members whom he was  
and acted as the supervisor of the audit without even meeting with or speaking to the  
2
engagement partner, Wightman.  
asked to supervise. Nevertheless, he planned  
2
604  
and supervised the audit!  
[
2322] No planning occurred with respect to obtaining audited (or even unaudited)  
financial statements of borrowers, guarantors and the entities whose shares had been  
pledged or whose accounts had been assigned as collateral. This omission was  
particularly troubling in the case of unsecured loans, loans secured by pledges of  
shares and loans secured by assignments of accounts receivable. During the 1988 to  
1
990 period, the audit staff charged with reviewing the investment section in both  
Montreal and Europe did not receive one single audited financial statement of a  
borrower or of an entity relied upon to give value to security.  
[
2323] No planning occurred for the use of appraisals. The staff members were not  
instructed in the required steps for analyzing the assumptions used in an appraisal  
report and comparing such assumptions to actual performance.  
[
2324] The planning did not provide any instructions or procedures to assess whether  
loan covenants had been breached by borrowers. No procedures were planned to  
question management on their credit approval and monitoring processes. The audit plan  
failed to include any provision for having staff experienced in the audit of loans  
generally, and real estate loans in particular, assigned to this crucial function.  
[
2325] In 1988 and 1990, the planning did not require calculation of the quantum of  
capitalized interest in Montreal. This aspect was not considered at all in the overseas  
audits during any of the three years, even though such a calculation was effected in  
1
986. In the overseas audit, there was no planning memorandum and no evidence in  
the AWPs of audit planning in any of the three years.  
[
2326] The complexity of the structure of the loans and the detailed audit work required  
to properly perform the required audit procedures could only be done by an experienced  
and well trained auditor with specific knowledge of the audit of real estate and  
construction loans. The failure to plan for appropriately trained and experienced staff  
was exacerbated by the superficiality of the supervision and review. Countless errors  
2600  
2601  
2602  
2603  
2604  
Hunt, March 28, 1996, p. 20  
Hunt, March 28, 1996, pp.5 and following  
Hunt, March 28, 1996, pp. 10-11  
Hunt, March 28, 1996, p. 20  
Hunt, March, 28, 1996, pp. 29 and following  
500-05-001686-946  
PAGE: 479  
contained in the AWPs are eloquent evidence of the failure to plan for supervision and  
review.  
[
2327] C&L was opining on consolidated audited financial statements. Planning was  
even more crucial that C&L had accepted to use two separate and different audit teams,  
one for CHL and one for the overseas subsidiaries, while CHL and the overseas  
2
605  
.
subsidiaries were lending to the same borrowers  
[
2328] For example, C&L failed to take into account how the client’s business had  
evolved, namely how much more loans and allegedly generated revenue were with the  
overseas subsidiaries, and to allocate the proper human resources accordingly.  
the portfolio overseas was growing and it now surpassed the portfolio in  
Montreal and a consolidated audit plan was properly used sending two peoples  
overseas to do the audits of a number of companies, two sets of consolidations,  
put them together, plus audit a loan portfolio that's larger than the loan portfolio in  
Montreal, where you're sending five people in for three weeks, and you're  
sending two people for ten days, roughly, overseas, that's just a recipe for  
2606  
disaster.  
(our emphasis)  
[
2329] The following illustrates the effect, a negative consequence, of the failure to plan  
the audit in conjunction with the C&L Europe team.  
•
Ford did not select the $20 million of CFAG loans made to YH (YHDL and  
KVWIL) for audit review even though these loans represented the vast majority of  
the loan portfolio of CFAG and even though the audit plan in Montreal called for  
C&L to select approximately 85% of the loans by dollar value for detailed audit  
work.  
2
607  
[
2330] Knowledge gained in prior audits should have served as planning tools.  
The  
following examples will serve as illustrations of knowledge that could have, and should  
have served, but did not:  
•
The situation of the loans to Lambert (never followed up) and the relationship  
between the Lambert loans and the Toronto Skyline property.  
o C&L knew, prior to 1988, about the relationship between Lambert and  
Topven and the information should have been brought forward each year.  
o Ron Smith confirmed the relationship when he explained the major  
2
608  
refinancing to the junior auditor for the 1988 audit.  
2
2
2
605  
606  
607  
For example see : YH Group, MLV, MEC and the Toronto Skyline  
Vance, March 13, 2008, p. 183  
Vance, March 11, 2008, p.41; PW-1419-1A, section 5140.06 (1988); PW-1419-2A, section 5140.06  
(1989); PW-1419-3A, section 5140.06; Wightman, February, 11, 2010, pp.143 and following  
2608  
R. Smith, September 5, 2008, pp. 34-35.  
500-05-001686-946  
PAGE: 480  
o For the 1986 audit, JG Martin brought forward the fact that he had been  
unable to obtain financial information about Lambert from Stolzenberg and  
that the consolidated financial statements should not be released in final  
2
609  
Wightman erroneously assumed that the  
form without that information.  
balance sheet of Lambert was provided to his staff although there is no  
2
610  
The 1986 audited financial  
evidence in the AWPs to that effect.  
statements were issued and there was no follow-up thereafter.  
o Pursuant to discussions that would have taken place at the 1986 wrap-up  
meeting, something was supposed to happen to the Lambert loans within  
a short period. Nothing happened, except the continued capitalization of  
interest. There was no follow-up.  
2611  
•
•
Reluctance of Stolzenberg to communicate information.  
The capitalization of interest on the CHL loans to debenture holders of MLV to a  
CHIF loan2 (in relation to compliance with loan covenants).  
612  
•
•
Representations made regarding the payment of loans related to the MLV project  
in 1986 and 1987 (not followed up).  
2
613  
Representations relating to refinancing of certain projects  
(planned  
refinancing ), and the need for projects to be sold to “clear out” the loans.2615.  
For example, with respect to Mellon Bank and the MLV project).  
2
614  
(
•
•
Concentrations of loans – more than 50% of Castor’s loans were connected to  
the YH group (a fact that appeared from the AWPs).  
The very small amount of cash payments during eleven months (January to  
November), the significant amount received in December and the use of Account  
046 (YH account), especially at year-end.  
•
The nature of the security for the loans in the portfolio – by 1988, less than half of  
the loan portfolio was secured by collateral in the form of real estate.  
•
•
The roll over, year after year, of loans.  
Gambazzi acting for Stolzenberg on an “in trust” basis, from time to time (in  
connection to related party transactions).  
2
2
2
2
2
2
609  
PW-1053-31, seq. p. 278.  
610  
611  
612  
613  
614  
Wightman, February 11, 2010, p. 171.  
PW-1053-3, pp. 473-477; Wightman, February 11, 2010, pp.159 and following  
PW-1053-3, pp.473-477  
PW-1053-23, seq. p. 168 re: Skyline Hotels; R. Smith, September 5, 2008, p. 40.  
PW-1053-23, seq. p. 117 re : $50M from the Mellon Bank so that Castor’s loans will be reduced in the  
next 3-4 months by $15-18M.  
2615  
PW-1053-23, seq. p. 117 re : Meadowlark, which C&L knew was an Edmonton Shopping Centre  
ranking behind a loan to BMO.  
500-05-001686-946  
PAGE: 481  
[
2331] C&L should have followed-up on the client’s representations made at the year-  
end meetings, they should have used them as a planning tool, but they did not. Had  
they done that, they might have elucidated some management misrepresentations. The  
following examples will serve as illustration:  
•
Representations at the 1986 audit year end meeting that some of the loans  
relating to the MLV project (loans to debenture holders) should be repaid by  
1
987.2 None of these loans were repaid.  
616  
•
Representations at the 1988 audit year-end meeting about a complete  
refinancing of MLV by Mellon bank, about a reduction of Castor’s exposure on  
MLV and about the sale of the project for $90 to $100 million (sale in 1990) or  
2
617  
The Mellon Bank withdrew its offer to finance, Castor’s  
sale of the mortgage.  
exposure increased and nothing was sold.  
o Wightman said that Stolzenberg had advised him that the Mellon Bank  
financing had not gone through but there is no documentary evidence that  
Wightman or anyone at C&L inquired about why these plans did not  
materialize. There is no evidence either that anyone considered the  
implications of the abortion of the Mellon Bank financing with respect to  
2
618  
the collectability of the related loans or how this information impacted  
2
619  
in the draft 1987 MLVII financial  
on the future operations note  
statements contained in the AWPs.  
[
2332] The audits were not planned to address the dangerous concentration of loans to  
the YH group and the risks associated with such concentration.  
[
2333] Although C&L understood that Castor’s practice of capitalization of interest was a  
“
hot topic” because of the possibility that borrowers could not meet their obligations,  
they did not adjust their audit of the loans to obtain information as to why the borrowers  
were failing to meet their loan covenants (as had been recommended by Higgins in the  
peer review). This was a blatant audit failure. C&L also failed to determine why the YH  
borrowers were not respecting their loan covenants regarding the monthly payment of  
interest and, in the case of loan 1081, the quarterly payments of principal and  
interest2  
620  
.
[
2334] The audits were not planned to allow sufficient resources and sufficient time to  
carry out the needed work, and it jeopardized the confirmation process of the overseas  
subsidiaries of Castor.  
2616  
2617  
2618  
2619  
2620  
PW-1053-3, sequential page 474; Wightman, February 11, 2010, pp.176 and following  
PW-1053-23, sequential page 117; Wightman, February 11, 2010, pp. 189 and following  
Wightman, February 25, 2010, pp. 86–91; PW-1053-19, seq. p. 102.  
R. Smith, May 16, 2008, pp. 89-92; PW-1053-23, seq. p. 166.  
PW-1054-3  
500-05-001686-946 PAGE: 482  
[
2335] For the overseas subsidiaries, C&L used a confirmation process they should  
never have contemplated, and which defeated the purposes of this essential audit  
procedure. They completely gave up control over the preparation and the mailing of the  
confirmations, leaving it into the hands of Bänziger. They also gave up having an audit  
staff member, who knew about Castor’s business and affairs, and who could review the  
signed confirmations: the confirmations were sent to C&L’s Geneva office, and they  
were handled by a C&L Geneva partner who did not have that knowledge.  
[
2336] When correctly performed, the confirmation procedure provides one of the best  
2621  
The  
forms of substantive audit evidence, especially when dealing with third parties.  
existence assertion is confirmed: it is one of the most used audit tests, a universal  
test.2 But for it to achieve its goals, there are fundamental prerequisites.  
622  
[
2337] In his book “The External Audit”, R.J. Anderson, an authority recognized by all  
experts who appeared before this Court, identifies the six prerequisites for reliable  
confirmation (to allow the confirmation process to satisfy its purposes):  
Six prerequisites for reliable confirmation are: respondent independence, client  
consent, careful checking, auditor control, provision of return address, and  
respondent comprehension. (…)  
1
. Independent respondents can be expected, in their own self-interest, to  
provide accurate replies to confirmation requests. Most non-independent  
respondents may be equally accurate in their responses, but there is always the  
danger (a) that they themselves rely wholly on the records of the company under  
audit or (b) that they may be instructed by an officer of that company to provide a  
specified response without further checking. In either case, the confirmation  
provides no evidence in addition to that available from internal documentary  
evidence, and in the latter case it may well be concealing fraud or deliberate  
misrepresentation. Control over the risks of reliance on non-independent  
respondents depends on the thoroughness of the auditor’s procedures for  
identifying related parties and auditing related party transactions (see Chapter  
2
1).  
…)  
. All pertinent information in the confirmation request should be carefully  
(
3
checked by the auditor prior to mailing. Descriptive information, dollar  
amounts, date of the confirmation, and name and address of the prospective  
respondent should be compared to the client’s accounting records. If the  
address is a post office box number or if it appears unusual, it may be desirable  
to compare it with the telephone book or trade directory. If control is inadequate  
to prevent an employee from misappropriating cash receipts, that employee  
could use a post office box or other address to which he or she controlled  
2
621  
622  
PW-1419-1A, section 5300.20 (1988); PW-1419-2A, section 5300.20 (1989) ; PW-1419-3A, section  
5
300.20 (1990); Vance, April 7, 2008, pp.47 and following  
2
Vance, April 7, 2008, p.48  
500-05-001686-946  
PAGE: 483  
access, under a fictitious name or the name of an actual customer, to intercept  
correspondence such as a confirmation request and fabricate a fraudulent reply.  
4
. It is important the auditor control the selection, preparation, checking, and  
mailing of the confirmation requests. There is always the danger that they may  
be inadvertently lost or, worse, deliberately suppressed or altered by an  
employee wishing to conceal discrepancies. Thus, while the assistance of the  
client’s clerical staff should be sought to minimize the costs of preparing, typing,  
and addressing confirmation requests, these procedures and the final mailing  
2623  
of the requests should be under the auditor’s control. (…)  
(our  
emphasis)  
[
2338] C&L knew control was an essential ingredient of the integrity of the confirmation  
process: in their internal material, they described the procedures as follows:  
5
The procedures listed below should be among those followed when the  
confirmation technique is employed:  
(
(
a) The request should be mailed by the auditor.  
b) An envelope bearing the auditor’s return address should be included in the  
mailing to ensure that the response is received directly.  
(
c) Names and addresses should be checked to appropriate client records.  
(
d) Any requests that cannot be delivered by the post office should be  
investigated either by the auditor or by the client under the auditor’s control.  
(
e) Account balances and other financial information included in the confirmation  
request should be checked to the accounting records. When such checking is  
done to detailed accounting records that support a control account, the total of  
the details should be agreed to the control account. After such checking has  
been completed, the auditor should maintain control over the confirmation  
requests until he has mailed them.  
(
f) All responses should be reviewed, and any exceptions noted should be  
investigated either by the auditor or by the client under the auditor’s control.  
(
g) Confirmation requests should be clear and concise and should be prepared in  
a form that makes replying easy (e.g., by providing a copy of the request for  
return to the auditor and space for the addressee to sign indicating that the  
2624  
information is correct).  
[
2339] Moreover, C&L was aware that a review of the signed confirmation responses  
was a procedure which could assist the auditor in identifying undisclosed related party  
2
623  
624  
PW-1421-1  
2
PW-1420, tab 13, TPS-A-313, Appendix A, page 2  
500-05-001686-946  
PAGE: 484  
transactions. In connection with the 1982 audit, one of C&L’s supervisors indicated in  
2
625  
the following queries in respect of returned confirmations:  
Have you examined signatures - it appears that Stromeyer & Raulino are same.-  
Pls verify that all related parties are adequately disclosed. The confirmations may  
2626  
tell you something  
2
627  
that would explain and justify C&L’s decision to accept  
[
2340] The alleged reasons  
the total delegation of the confirmation process to Bänziger are unacceptable. Even  
though it was legitimate to wish to satisfy the client’s deadline and to try to maximize the  
responses’ rate, C&L should have known better.  
[
2341] C&L was not facing a situation described in sections 6020.12 and 6020.19 of the  
2628  
communication with Castor’s debtors was not impracticable or deemed to  
Handbook:  
2
629  
be harmful . In any case, assuming C&L could or would have seen it otherwise,  
abdicating the control of the confirmation process in favor of Bänziger was not a suitable  
alternative.  
[
2342] Lack of planning had a serious and negative impact on the quality of the audit  
work, and it prevented the exercise of sound professional judgment, whereas it is a  
cornerstone to comply with GAAS.  
Examination performed without due care and by persons that did not have adequate technical training or  
proficiency in auditing  
[
2343] For the 1988, 1989 and 1990 audits, C&L never asked to see any credit analysis  
performed by Castor in connection with the making or the renewal of the loans that they  
reviewed with Ron Smith2  
630  
.
[
2344] They did not question Ron Smith as to the performance of the projects, the debt  
service requirements associated therewith or the financial capacity of the borrowers or  
2
631  
guarantors to satisfy their obligations.  
[
2345] This is particularly noteworthy because in November 1988 (prior to the 1988  
audit), a peer review of the Castor Montreal audit specifically noted that the loan  
questionnaires «do not address the question of whether the client is up to date with their  
2
2
2
2
625  
626  
627  
628  
PW-1053-49, audit working papers BB-7 to BB-72  
PW-1053-47- 3 seq. p. 333  
Jean Guy Martin, January 5, 2010, pp.117-118  
PW-1419-1A (1988); PW-1419-2A (1989); PW-1419-3A (1990); see also PW-1419-4A (same section  
–
no significant changes- from 1973 to 1987)  
2629  
For example: see exhibits and situations described by Counsel for the Plaintiff in Jean Guy Martin  
cross-examination, January 6, 2010, pp.222 – 237 and January 7, 2010, pp.31-53  
Ron Smith, May 14, 2008, p. 92  
2
630  
631  
2
Ron Smith, May 14, 2008  
500-05-001686-946  
PAGE: 485  
review of the debtors financial position or has complied with all loan covenants.  
Consideration should be given to revising the loan review sheets used in conjunction  
2
632  
with those currently in use on bank audits»  
[
2346] Despite this criticism of the audit work, C&L did not modify the questionnaires or  
attempt to assess the way Castor approved or monitored loans.  
[
2347] The audit work was superficial, limited to a mechanical review of commitment  
letters and promissory notes and the filling out of forms, without thought or analysis.  
[2348] Smith described the exercise as follows:  
They never asked me to review any financial statements or the results of the  
hotel. That was not part of their focus. Their focus was basically a superficial type  
of analysis. And it was the same for all loans, it was a review of the loan  
documentation to make sure that it was in order, and it was a limited review,  
limited primarily to promissory notes, mortgage documents and the appraisal,  
and that was it. There was no other review of any other documents, and I was  
2633  
never asked for it.  
[
2349] Smith’s description of the exercise is corroborated by the testimonies of audit  
2634  
team members who worked on the CHL investment section of the audits.  
[
2350] C&L did not request to see audited or unaudited financial statements of YHDL,  
YHDHL, KVWIL or other YH entities, nor net worth statements of Wersebe. In fact, C&L  
did not consider that financial statements were a necessary tool to perform their audit  
2
635  
.
work, and they did not consider the borrowers’ capacity to pay  
[
2351] The most junior members of the Montreal audit team were assigned to audit the  
loans. Information that appeared in AWPs of prior years was mechanically (and usually  
erroneously) brought forward to later audit years without any analysis or critical review.  
[
2352] C&L had the obligation to assess the credit monitoring process and to verify that  
Castor’s borrowers were complying with their loan covenants. They failed to perform  
2
636  
such elementary auditing procedures.  
[
2353] Junior staff believed that promissory notes were security and merely compared  
the loan balance to the face amount of the promissory note to determine if there was a  
deficiency.  
2
2
2
632  
633  
634  
PW-1426, para. 5(h)  
R. Smith, September 5, 2008, p. 47  
1
988: Séguin, December 12, 1995, pp. 283-295, October 25, 1996, pp. 60-68, pp. 152-153, pp. 193-  
95, and p. 237.; 1989: Belliveau, April 1, 1996, pp. 69-96, 109; 1990: Quesnel, November 23, 1995,  
1
pp. 176-188, November 24, 1995, pp. 102-108  
2
635  
636  
Quintal, February 19, 1997, pp. 39-44; December 1, 1995, pp. 85-95; Belliveau, April 1, 1996, pp. 98-  
1
03; Quesnel, November 24, 1995, pp. 147-155; Wightman, September 27, 1995, pp. 36-38  
2
PW-2908, Vol. 1, p. 4-B-13; Vance, March 13, 2008, pp. 179–186; Vance, March 6, 2008, pp. 79-84  
500-05-001686-946  
PAGE: 486  
[
2354] C&L failed to consider the purpose of the loans and to verify whether funds were  
being advanced to borrowers to create value.  
[
2355] Numerous red flags2 were readily apparent regarding the portfolio at large and  
637  
the YH corporate loans, in particular. Information was available to C&L audit staff  
2
638  
members, but they did not look at it or they did not ask for it.  
2356] When negative information was provided to C&L, their audit approach did not  
[
change, and no further questions were put to Castor management. The auditor did not  
2
639  
request or obtain additional audit evidence.  
L ack of supervision and review  
[
2357] The Handbook defines “supervision” as follows:  
Supervision consists of:  
(
a) instructing assistants as to:  
(
i) the procedures they are to perform and the objectives of such  
procedures, and,  
(
ii) matters such as those outlined in paragraph 5150.06 which in the  
auditor’s judgment are relevant to the portion of the examination they are  
to perform;  
(
b) determining by such means as observation, discussion and review whether  
the work carried out by assistants is properly executed, and,  
(
c) keeping informed of auditing problems encountered by the assistants during  
2640  
the examination so that their significance may be evaluated.  
[
2358] C&L’s own material includes the following information and instructions relating to  
supervision and review:  
1
.
When a partner delegates work to other personnel, he continues to be  
responsible for forming and expressing the opinion of the financial statements.  
2
637  
Vance, March 13, 2008, pp.181-182; Froese, November 28, 2008, pp.187 and following; Froese,  
December 2, 2008, pp. 124-127; Froese, January 12, 2009, pp.101-102; Froese, January 27, 2009,  
pp. 58-64 ; Rosen, February 17, 2009, pp. 220- 223; Rosen, February 20, 2009, pp. 178-179; Rosen,  
February 27, 2009, p. 17, 91, 97, 168, and 209 and following ; Rosen, March 24, 2009, pp.28 and  
following; Selman, May 6, 2009, pp.93-94; Levi, January 29, 2010, pp.169-170.  
R. Smith, September 17, 2008, p. 162  
2638  
2639  
2640  
R. Smith, September 16, 2008, pp. 213-218.  
PW-1419-1A, section 5150.07 (1988); PW-1419-2A, section 5150.07 (1989); PW-1419-3A, section  
5150.07 (1990);  
500-05-001686-946  
PAGE: 487  
For this reason, adequate control procedures involving supervision and review  
are an essential part of engagement management.  
2
.
Supervision includes monitoring the work done to ensure it is in  
accordance with the audit strategy and plan. Detailed monitoring would usually  
be performed by the staff member in charge or the manager.  
3
.
Supervision also involves:  
(
a) Monitoring the progress of work to determine that personnel at all to  
have the necessary skills for their assigned tasks, to understand their  
instructions and to be performing their work in accordance with the audit  
program and other planning documents;  
(
…)  
4
. Thus, work done by each auditor should be supervised, reviewed and  
approved by a more senior person. The staff member in charge will normally  
review the work of staff under his control, the manager will review the audit as  
performed by the field staff, and the engagement partner will review the overall  
quality and conduct of the audit.  
(
…)  
6
. The manner in which supervisory and review procedures are carried out will  
depend on various factors, including the level of experience (both general and as  
applied to the particular engagement), training and competence of the various  
personnel involved. Accordingly, this policy statement does not set out in detail  
how the procedures should be performed.  
7
. Some general guidelines for the review of audit files and working papers are  
listed below:  
(
…)  
(
e) The reviewer should ensure that all significant exceptions identified by  
the staff member who has performed the work are disposed of  
satisfactorily or, in the case of significant exceptions, recorded on the  
interim or final MAP form.  
8
. It is the Firm’s policy that there should be proper evidence on the audit file for  
all significant audit work performed, including its review and approval (see TPS-  
A-202, Audit Files and Working Papers). The Firm’s documentation generally  
provides for the evidencing of review and approval procedures.2  
641  
2641  
PW-1420, Tab 8 : TPS-A-216 “Engagement Control”, December 22, 1986  
500-05-001686-946  
PAGE: 488  
2
642  
that eloquently  
[
2359] The working papers of C&L contain countless errors  
evidenced the failure to plan for supervision and review, and the failure to supervise and  
review.  
[
2360] The audit suffered from a virtual absence of supervision and review, as the  
content of C&L’s audit working papers eloquently illustrate. For example, and to cite just  
a few:  
•
For each of the 1988, 1989 and 1990 years, the same loan information  
questionnaires and loan evaluation questionnaires used for the 1987 (and  
previous audits) continued to be used, despite the comments in response to the  
2
643  
that consideration would be given to  
Quality Control review of the 1987 audit  
amending the forms or using the loan review sheets that were designed for bank  
audits.  
•
The loan information questionnaires and loan evaluation questionnaires on file  
were not fully completed and contained many errors, including the following:  
o The complete address of the borrower was not shown.  
o Despite that interest was not being paid in accordance with the loan  
covenants, and was being systematically capitalized, the question “Are  
interest and repayment terms being met?” was continually incorrectly  
answered “Yes”.  
o The section of the loan evaluation questionnaire dealing with audited  
financial statements of borrowers was not completed. This failure was  
crucial in that C&L did not audit the ability of the borrowers to repay their  
loans and to satisfy their debt service obligations.  
o In many cases, the value of real estate security is shown as “per Ron  
Smith” and there is no further audit evidence to support these  
representations, while there should be to comply with the need to obtain  
SAAE.  
o The question “Existing Liens on property” was left blank in cases where  
there was significant prior ranking debt on the property.  
•
The “Auditor’s Overall Appraisal of Loan” was generally left blank in 1988 and  
1
989. In 1990, while this was generally completed, in a number of instances,  
C&L staff expressed concerns over the underlying security, or lack thereof, and  
those concerns were never dealt with and resolved by more senior personnel.  
2
642  
643  
PW-1053  
PW- 1426  
2
500-05-001686-946  
PAGE: 489  
[
2361] The design of the Castor audits was such that only one member of C&L had a  
global perspective of the company, a sound knowledge of the loan portfolio as a whole  
2644  
Montreal and overseas) . Except for Wightman, the engagement partner, no one  
2645  
(
else at C&L really knew Castor’s business.  
[
2362] C&L’s internal materials on engagement control2646 and on MAPs , provide  
2647  
guidance as to the expectations for the work of the engagement partner who is  
responsible to «review the overall quality and conduct of the audit».  
[
2363] Nevertheless, Wightman did not:  
•
•
Know what level of experience the audit staff members had.2648  
Discuss with the managers and supervisors the level of experience  
2
649  
required to work on the various audit sections.  
Review the audit working papers.2650  
•
•
Assess the quality of the work that had been done2651  
.
[
2364] Lack of review and lack of supervision had serious and negative impact on the  
quality of the audit work and it prevented the exercise of sound professional judgment  
whereas it is a cornerstone to comply with GAAS.  
Unqualified opinion without sufficient appropriate audit evidence  
2
652  
requires that the examination be performed by  
[
2365] General Standard 5100.02  
persons with adequate technical training and proficiency in auditing, and with due care.  
[
2366] Nevertheless, the audit staff assigned to work on the crucial and high risk  
elements of the 1988, 1989 and 1990 audits in Montreal lacked the experience,  
expertise and guidance to enable them to perform their tasks adequately. Junior  
members were assigned to work on the investment section of the audits, while it is one  
2
653  
of the most difficult, if not the most crucial section of the audit work to be done.  
2644  
2645  
2646  
2647  
2648  
2649  
2650  
2651  
2652  
2653  
Wightman, March 9, 2010, pp. 73–74.  
Martin, December 18, 1995, p. 154.  
PW-1420, Tab 8.  
PW-1420, Tab 5.  
Wightman, March 9, 2010, pp. 59-60, 79  
Wightman, March 9, 2010, pp.60 and following  
Wightman, March 9, 2010, pp.59, 79 and following  
Wightman, March 9, 2010, pages 58 to 63, 79 and following  
PW-1419-1A (1988); PW-1419-2A (1989); PW-1419-3A (1990)  
Hunt, March 28, 1996, pp.35-36  
500-05-001686-946  
PAGE: 490  
Q.-Now, do you agree that the highest risk of material misstatement in the Castor  
audits was with respect to the carrying value of certain loans and investments?  
A- Yes.  
Q- And would you also agree that, for that reason, it would be necessary to  
design audit procedures to be satisfied that the carrying value of Castor's loans  
and investments was appropriate?  
A- It would be necessary to select appropriate procedures, whether they were in  
the plan or not in the plan, before they went into do the field work. They certainly  
had to select appropriate procedures when they started to do the field work,  
when they... in the carrying of the field work, they had to carry out appropriate  
2654  
procedures.  
[
2367] Provided they were properly supervised, Selman sustained that juniors could  
work on the investment section of the Castor audit. Lack of supervision or inadequate  
supervision would constitute however a clear breach of GAAS, said Selman.  
Q.-So you're saying that a green auditor should have had no difficulty in getting  
the audit of Maple Leaf Village correct, is that what you're suggesting?  
A- I'm saying that a green auditor properly supervised ought to be able to have  
accomplished that, yes, it's how you learn, by making mistakes and having  
people correct them.  
Q- And what if the corrections are not made, is that a serious breach of  
GAAS?  
A- It depends upon the consequences, but it's a breach of GAAS, yes.  
Q- Now, the person assigned to do the work, would it not have been required that  
that person have experience and knowledge in auditing real estate loans and  
more complex loans?  
A- It's just impossible. You come back to what I said before, you have a pool of  
people. It would be nice to take a real estate expert, but there are very few real  
estate experts to our... you know, late students, or early CA's, it just doesn't work  
that way.  
Q- So is it your testimony that it's acceptable under GAAS to take a student and  
put that student in charge of doing the audit of the investment section?  
A- If he's properly supervised.  
Q- So your answer is yes, it's acceptable to take a student?  
2654  
Selman, June 1, 2009, p. 102  
500-05-001686-946  
PAGE: 491  
A- If he's properly supervised.2655  
(
our emphasis)  
[
2368] Supervision was inadequate, if there was supervision. Audit working papers were  
deficient and would not allow an external review. No supervisor intervened to correct the  
situation.  
Q.-Would you agree with me that there were a surprisingly large amount of audit  
working papers dealing with the audit of the investment section that were  
deficient?  
A- Well, there certainly were a number of working papers as I recall that were  
2656  
deficient (…)  
Q.-On your review of the working papers of the investment section in Montreal,  
did you note an inordinate amount of errors, big and small?  
A- No, I noted... what I did notice, as best as I can recall, was a number of gaps,  
sections not filled in, what I have seen many times, which is sort of insufficient  
documentation of working... on the working papers, insufficient information on the  
working papers to permit a external review at a distance in time.2657  
[
2369] By 1988, C&L was or should have been aware than at least a half of Castor’s  
investment portfolio was secured by collateral other than real estate. The shift in the  
composition of the security for Castor’s loans was critically important. Nevertheless,  
C&L conducted the Castor audits on the premise that the loans were secured by real  
estate.  
[
2370] The failure of C&L to understand the shift in the nature of Castor’s lending  
operations led to a failure to recognize the increasing and alarming risks in the nature of  
its business and to egregious failures in both audit planning and execution.  
[
2371] In its audits of 1988, 1989 and 1990, C&L failed to obtain sufficient appropriate  
audit evidence (“SAAE”) in respect of the collectability of the loans and the ability of  
Castor’s borrowers and guarantors to satisfy their obligations. Moreover, in most cases  
where the securities of the loans were not mortgages on real estate, C&L obtained no  
SAAE.  
[
2372] C&L failed to seek or obtain reliable financial information regarding the various  
YH borrowers. C&L should have sought and obtained audited financial statements of  
YHDL and, at the least, insisted on obtaining unaudited statements of the other YH  
2655  
2656  
2657  
Selman, June 1, 2009, pp. 137-138  
Selman, June 1, 2009, p. 77  
Selman, June 1, 2009, p. 140  
500-05-001686-946  
PAGE: 492  
borrowers, credit analyses prepared by Castor and other SAAE that would have  
enabled them to reach conclusions as to the borrowers’ capacity to pay and as to the  
carrying value of the loans.  
[
2373] Although YHDL’s audited financial statements were included in the 1987 AWPs,  
no concern was raised when no such financial statements were made available for  
2
658  
review by C&L in 1988, 1989 and 1990.  
[
2374] Representations by Castor management that loans would have been “good”  
made no difference: still, C&L had to obtain SAAE, an obligation that Selman  
acknowledged as follows:  
Did you make or do you make any distinction between a circumstance where the  
auditor is told that a loan is good or okay and a situation where no such  
statement is made?  
I don't see a difference. The first one is simply a representation that needs to be  
corroborated by sufficient appropriate audit evidence. In the second situation,  
you have an assertion in the financial statements, the financial statements  
themselves, that the books and records are an assertion as to the carrying value  
and so consequently, that also has to be subjected to the acquisition of sufficient  
appropriate audit evidence to support the assertion. They're both assertions, one  
just happens to be verbal.  
Q- So, it's essentially the same situation.  
A- Essentially2659  
.
[
2375] C&L not only failed to obtain sufficient appropriate audit evidence; they also  
failed to document properly the work allegedly done.  
Working papers  
[
2376] An auditor should document matters which, in his professional opinion, are  
2660  
.
important in providing evidence to support the content of his report  
[
2377] While it is neither necessary nor practical for the auditor to document in his  
working papers every observation, consideration or conclusion, the auditor needs to  
document matters which, in his professional opinion, are important in providing  
2658  
2659  
2660  
Quintal, December 1, 1995, p. 92.  
Selman, May 26, 2009, p. 104  
CICA handbook - section 5145.06 (italicised recommendation) - PW-1419-1A (1988), PW-1419-2A  
(
1989) and PW-1419-3A (1990)  
500-05-001686-946  
PAGE: 493  
evidence to support the content of his report, including his representation as to  
2
661  
.
compliance with generally accepted auditing standards  
[
2378] The preparation of good audit working papers is an essential part of audit work.  
2379] Good working papers provide a record of matters like the client’s operational  
[
history, and the auditing problems encountered.  
[
2380] Working papers contribute to the quality of the examination by providing a good  
starting point for planning the audit of the subsequent period.  
[
2381] Since there is not necessarily staffing continuity on a particular audit  
engagement, working papers are an important means for new staff to gain an overall  
understanding of the client’s organization and operations, and to anticipate problems  
encountered in previous years.  
[
2382] If work is done and not properly documented on the working papers, how can a  
reviewer carry out a proper review and assess the judgments made by the preparer?  
[2383] Working papers reflect the quality of the audit work done.  
[
2384] Even though every accounting firm has a slightly different approach to file  
organization, approaches are not so unique that another auditor cannot readily  
understand them.  
[2385] As Selman writes on page 265 of his report:  
There are many common ways in which things are done such that files are  
generally easily understood by auditors from other firms, and, once someone  
looks at a file, it isn’t difficult to describe how that file is organized.2  
662  
[
2386] Other auditors, who may act for third parties, should be able to contend, from  
looking at the working papers, that a proper audit was carried out. Working papers must  
be prepared with this in mind.  
[
2387] Adequate documentation of planning, knowledge of the client’s business,  
accounting procedures, the internal control systems, test procedures, results of test  
work, important discussions with client officials, decisions and conclusions reached, will  
enable the auditors to perform their audit adequately and appropriately.  
[
2388] In February 1980, the CICA issued an audit technique study titled “Good Working  
2663  
Papers”, a revised edition of a study first published in 1970 . What working papers  
2
661  
CICA handbook - section 5145.01 - PW-1419-1A (1988), PW-1419-2A (1989) and PW-1419-3A  
(
1990)  
2662  
663  
D-1295  
PW-2910  
2
500-05-001686-946  
PAGE: 494  
should demonstrate in a year-end file is found in Chapter 3 on organization and content,  
at paragraph 41. Its item 4 reads as follows:  
The auditors’ compliance with generally accepted auditing standards.  
The year-end working papers should record the nature, extent and timing of the  
auditing procedures carried out, and identify the audit evidence obtained to check  
the existence, occurrence, completeness, ownership, valuation, measurement  
and statement presentation of each material item. The working papers should  
include a conclusion as to whether each item has been fairly stated on a  
consistent basis. Evidence that there has been appropriate consideration of  
events occurring subsequent to the balance sheet, and conclusions on their  
disposition should also be included. The procedures used will usually conform  
with a standard approach predetermined by the auditors. One method of  
encouraging a uniform approach to audit engagements is to use preprinted audit  
programs adapted to meet the specific requirements of the audit of the client in  
2664  
question.  
[
2389] C&L and its staff knew or should have known all the above. C&L’s internal  
material makes it obvious.  
[2390] In TPS-A-202 titled “Audit Files and Working Papers”, C&L writes:  
“AUDIT FILES AND WORKING PAPERS  
Introduction  
1
. This policy statement describes the audit files normally maintained on all audit  
engagements and the working papers completed in the course of the audit  
examination.  
2
. Audit files (with particular reference to items (a) and (b) in paragraph 12) and  
the working papers contained therein constitute a historical record and sole  
documentary evidence of the audit examination. They must be legible, neat and  
orderly. It is quite possible that today’s audit files may be produced as evidence  
in a court of law in the future. Consequently, they should be prepared on the  
assumption that this may occur and that judgment of the Firm’s performance will  
2665  
be influenced by them.”  
[
2391] TPS-A-313 deals with substantive tests and appendix B, with substantive test  
working papers. C&L states in paragraph 5 of appendix B to TPS-A-313:  
5
. Working papers should be prepared in sufficient detail to allow the person  
reviewing them to:  
2
664  
665  
PW-2910  
PW-1420-1A  
2
500-05-001686-946  
PAGE: 495  
(
a) form an opinion whether the work was carried out so as to identify any  
exceptions in relation to the substantive test program step; and  
(
b) assess judgments made by the auditor regarding matters such as valuations  
2666  
.
of assets and liabilities  
[
2392] In TPS-A-216, C&L sets out its review policy as follows, in paragraphs 4 and  
2
667  
:
5
“
4. Thus, work done by each auditor should be supervised, reviewed and  
approved by a more senior person. The staff member in charge will normally  
review the work of staff under his control, the manager will review the audit as  
performed by the field staff, and the engagement partner will review the overall  
quality and conduct of the audit.  
A second partner will review specific aspects of the financial statements and  
audit (see TPS-A-209, Review of Audit Engagements by More than One  
Partner).  
5
. The review procedures can be divided into two separate functions, as follows:  
(
a) at the time the work is performed, the reviewer (as defined in paragraph 4)  
should be available when needed to give advice, guidance or other help to the  
staff members. The reviewer’s professional experience would often enable him to  
identify when such help is needed; and  
(
b) after the work is completed, it should be reviewed for technical content. Taken  
as a whole, the review process should be such as to ensure that the work done  
accords with that required, that it is properly documented on working papers and  
signed for on audit programmes, that exceptions are dealt with appropriately, and  
that conclusions drawn from the work are valid.”  
[
2393] Mari Beth Ford claims she was aware of the technical policy statements that  
2668  
.
existed for Coopers & Lybrand  
Coopers working papers for Castor’s audit (in general)  
[
2394] In his cross-examination, on June 11, 2009, Selman described the purpose of  
the working papers as follows:  
to provide information for two levels for the reviewer, the immediate reviewer, to  
understand what was done. That could have been done by a verbal discussion  
and not documented.  
2666  
2667  
2668  
PW-1420, tab 13, paragraph 5  
PW-1420, tab 8  
Selman, December 10, 2009, pages 49 and 50  
500-05-001686-946  
PAGE: 496  
The second purpose of the working papers is to identify the document on which  
reliance is placed with respect to a judgement called by the auditor on a matter,  
in this case the special agreement2  
669  
.
[
2395] Being asked if he would have expected Ford to document the evidence of a  
2670  
.
special agreement in the audit working papers, he said he would have  
[
2396] Being asked if he agreed that the failure to document the evidence of any special  
agreement, in the particular case that was discussed, was a serious breach of GAAS,  
he said:  
I don't consider it a serious breach of GAAS, but I do believe that it should have  
2671  
been documented  
So I would have expected it to be documented so that the special agreement  
could be identified at a later date, when there's a later review.  
Now, this special agreement has not turned up in the files, so not documenting it  
was a... was a breach of the expectations with respect to documentation, but as I  
told you when I was testifying in chief about the nature of working papers, a lack  
of perfection in the preparation of working papers is something that is quite  
common in the accounting profession, for better or worse, that's just the facts of  
the matter. So I wouldn't attach the word "serious" to it, it's just another case, in  
my view, of these working papers not containing all of the information that we  
2672  
would like them to have  
.
[
2397] Asked “During the course of your review of the audit working papers of the  
overseas audit, did you note many instances where Ms. Ford failed to properly  
document her audit procedures in accordance with GAAS?”, Selman replied:  
I certainly noted a number of instances where there is less documentation than I  
would have expected. Ms. Ford was, got to say, brief in preparing her working  
papers, generally speaking, so her working papers are not very fulsome or  
2673  
informative  
.
[2398] Selman qualified Mari Beth Ford’s working paper as:  
o Too brief. 2674  
o Certainly far from a perfect set of working papers.2675  
2669  
2670  
2671  
2672  
2673  
2674  
Selman, June 11, 2009, pages 13-14  
Selman, June 11, 2009, page 13 lines 15 to 17  
Selman, June 11, 2009, page 13 lines 18 to 22  
Selman, June 11, 2009, page 14 lines 7 to 20  
Selman, June 11, 2009, page 14 lines 21 to 25 and page 15, lines 1 to 4  
Selman, June 11, 2009, page 15 lines 5 to 7  
500-05-001686-946 PAGE: 497  
o Without question, below the standard of working paper preparation that  
2
676  
would be the norm.  
o Without question, not very good working papers in total. 2677  
o Below the norm. 2678  
o Definitely not meeting the normal standard of working papers that he  
2
679  
had seen in his experience.  
o Deficient.2680  
[2399] Levi commented on C&L’s working papers:  
I was just going to say, after looking at nineteen eighty-eight (1988), eighty-nine  
'89), it's about time they did a new sheet2  
681  
.
(
[
[
2400] Evidence revealed other situations where the file documentation was poor. 2682  
2401] C&L had an internal inspection program, sometimes referred to as a peer review.  
This quality control procedure was used to assess the quality of the audit work carried  
out by the partners of the firm, and to assess compliance with GAAP and GAAS as well  
2
683  
.
as compliance with firm policies and procedures  
[
2402] The specific objectives of the C&L’s National Quality Control Program is set out  
in TPS-A-600 and includes not only compliance with the policies and practices of the  
firm, but also «whether the report or communication issued in connection with the  
engagement is adequately supported in terms of the technical standards applied and  
the working papers.»2  
684  
[
2403] Appendix B of TPS-A-600 sets out areas that the national review of audits should  
2685  
concentrate on . These relate directly to GAAS and GAAP and include planning,  
2
686  
which is a GAAS standard , comments on whether accounting practices are followed  
including disclosure) and whether the estimates and other judgments made are  
(
2675  
2676  
2677  
2678  
2679  
2680  
2681  
2682  
2683  
2684  
2685  
2686  
Selman, June 11, 2009, page 15 lines 14 and 15  
Selman, June 11, 2009, page 15 lines 20 and 21  
Selman, June 11, 2009, page 15 line 25 and page 16, lines 1 and 2  
Selman, June 11, 2009, page 16 line 4  
Selman, June 11, 2009, page 16 lines 5 to 7  
Selman, June 11, 2009, page 16 line 9  
Levi, January 28, 2010, p. 205  
Levi, February 2, 2010, pages 198 to 200  
Vance, April 8, 2008, page 49 ; Froese, November 12, 2008, page 170  
PW-1420, Tab 16, paragraph 2  
PW-1420-1B, TPS-A-600, Appendix B, p. 3.  
PW-1419-1A section 5100.02(i) (1988); PW-1419-2A section 5100.02(i) (1989); PW-1419-3A section  
5
100.02(i) (1990)  
500-05-001686-946  
PAGE: 498  
reasonable, otherwise known as the “stand-back” look, and adequacy of supervision  
2
687  
.
and review, which is a GAAS standard  
[
2404] In a peer review report, issued in November 1988, prior to the 1988 audit, and  
concerning Castor’s 1987 audit, the following was noted:  
No partner disposition was noted on any individual MAP.2688  
The MAPs appear rushed and unorganized generally especially in light of the  
analysis on file in the various sections. 2  
689  
From the loan review sheets it is not clear that C&L has checked the information  
gathered to supporting documentation. The sheets also do not address the  
question of whether the client is up to date with their review of the debtors  
financial position or has complied with all loan covenants. Consideration should  
be given to revising the loan review sheets used in conjunction with those  
currently in use on bank audits2  
690  
[
2405] Despite this criticism of the audit work, and the content of the reply sent by  
2691  
Wightman concerning the loan review sheets , C&L did not modify the loan  
evaluation and information questionnaires. As a matter of fact, they did not attempt to  
assess the way Castor approved or monitored loans either.  
Year-end wrap-up meetings (in general)  
[
2406] As explained by Vance, «...a year-end meeting is held with management to  
review those matters and in effect determine what other audit evidence is needed, what  
2
692  
»
other work has to be done or get the audit evidence at that meeting.”  
[
2407] As Froese explained, an auditor needs to enter the year end meeting with an  
2693  
.
understanding of the work that was done  
[
2408] Vance explained that it is a normal practice for the engagement partner to bring a  
manager or the ”in charge” into the meeting as well, so a meaningful discussion about  
the audit can ensue.  
[
2409] C&L’s internal materials set out that «when a partner delegates work to other  
personnel, he continues to be responsible for forming and expressing the opinion of the  
financial statements. »  
2
687  
PW-1419-1A section 5100.02(i) and section 5150 (1988); PW-1419-2A section 5100.02(i) and section  
5
150 (1989); PW-1419-3A section 5100.02(i) and section 5150 (1990)  
2688  
2689  
2690  
2691  
2692  
2693  
PW-1053-21, seq. p. 353 item 2b  
PW-1053-21, seq. p. 353.item 2c  
PW-1053-21, seq. p. 353 item 5h  
PW-1053-21, seq. p.357 item 5h  
Vance, April 9, 2008, p. 20.  
Froese, November 25, 2008, p. 117.  
500-05-001686-946  
PAGE: 499  
[
2410] The final resolution of audit issues at the level of the engagement partner is a  
significant audit procedure and represents the final exercise of professional judgment at  
the highest level.  
[2411] Wightman did not take this audit step seriously, or seriously enough.  
[
2412] At trial, in 2010, Wightman tried to “improve” the testimony he gave on discovery,  
in 1995, with respect to the year-end meetings, suddenly being certain of things he was  
not sure of on discovery, and recalling new details that he did not previously recall  
despite extensive questioning on the very same issues much closer to the events in  
question. Here are few examples:  
o At trial, he recalled the structure of the meetings, and the order in  
2
694  
whereas on discovery, he could not  
which things were discussed,  
even remember how long the meetings generally were or when they  
took place2  
695  
.
o At trial, he allegedly remembered going back to his office after the  
2696  
990 meeting to compose his notes , while on discovery, he could  
2697  
.
1
not recall any details of what took place after the meeting  
o At trial, he claimed to be certain that he had the MAPs with him at the  
meeting2 . Whereas, on discovery, he did not say he had them.2699  
698  
o At trial, Wightman testified that Smith was present during the entire  
2
700  
whereas 15 years earlier, during the  
wrap-up meeting of 1990,  
examination on discovery, he was uncertain that Smith was present for  
2
701  
.
the entire meeting  
[
2413] On cross-examination at trial, in 2010, he admitted that he did not have any  
notes that could have refreshed his memory with respect to any of the meetings, other  
than the 1990 meeting notes, which he had during discovery as well.  
[
2414] Viewed in light of these recollections and numerous inconsistencies between  
new and old memories, serious questions arise as to the credibility and reliability of  
Wightman’s entire testimony.  
2694  
2695  
2696  
2697  
2698  
2699  
2700  
2701  
Wightman, February 8, 2010, pp. 178-182.  
Wightman, September 29, 1995, pp. 54-59, 66-67.  
Wightman, February 10, 2010, pp. 89-90.  
Wightman, October 10, 1995, p. 54  
Wightman, February 10, 2010, p. 57-58.  
Wightman, October 19, 1995, pp. 66-67.  
Wightman, February 11, 2010, pp. 93–95  
Wightman, September 29, 1995, p. 208.  
500-05-001686-946  
PAGE: 500  
Year-end wrap-up meetings for the 1988, 1989 and 1990 audits (in general)  
[
2415] Each year, at the end of the field work, prior to signing the Auditors’ Report for  
the annual consolidated financial statements, Wightman met with Stolzenberg for a  
wrap-up meeting.  
[
2416] Wightman considered that the audit work was finalized prior to these meetings  
and never requested further audit work before releasing the audited financial statements  
2
702  
.
because of issues that arose or information provided to him at wrap-up meeting  
[
2417] He testified that the team in Europe held its own wrap-up meeting with  
Stolzenberg and that, although he was not aware of the details of those discussions, he  
saw no need to discuss the overseas loans again at his own wrap-up meeting with  
Stolzenberg2  
703  
.
[
[
[
2418] Wightman had a cavalier approach with respect to this important audit step.  
2419] Wightman’s shortcomings in this respect resulted in many avoidable audit errors.  
2
704  
2420] He did not study the AWPs in detail , or ensure that a manager or the “in  
charge”, who possessed the required knowledge of the audit, was always with him at  
the meetings.  
o He was only accompanied once by the Montreal audit manager for the  
2
705  
.
three audits at issue  
o Although he testified that the reason why the manager in 1990,  
Quintal, did not attend the wrap-up meeting was because he was  
unavailable, this testimony is not reliable- Quintal did not recall ever  
2
706  
being asked to attend the meeting . In any event, in Quintal’s  
absence, Wightman did not request Hunt, the “in charge”, to attend in  
his place, even though he was available and, in fact, waiting on  
2
707  
Castor’s premises should he have been needed . Hunt  
acknowledged the rather startling fact that he never met once with  
Wightman throughout the whole audit and prior to being sent back to  
Halifax2  
708  
.
2
702  
Wightman, February 11, 2010, pp.181 and following; Wightman, February 25, 2010, pp.75 and  
following  
2703  
2704  
2705  
2706  
2707  
2708  
Wightman, March 9, 2010, pp. 75–76.  
Wightman, February, 25, 2010, pp. 39-40  
Wightman, September 29, 1995, pp. 47-49.  
Wightman, February 8, 2010, pp. 182-183; Quintal, November 29, 1995, p. 189.  
Hunt, March 28, 1996, pp. 68-69.  
Hunt, March 28, 1996, p. 20.  
500-05-001686-946  
PAGE: 501  
[
2421] Wightman inappropriately and negligently abdicated his responsibilities with  
respect to the resolution of issues pertaining to Castor’s overseas portfolio.  
[
2422] Wightman’s decision to exclude a consideration of the overseas portfolio as part  
of the wrap-up meetings he had with Stolzenberg essentially doomed the audits to fail  
as there was no analysis by C&L of the audit issues on a consolidated basis.  
[
2423] Wightman assumed that material matters had been cleared without any personal  
verification of the status of the issues and without any documentary evidence in the  
AWPs to support that conclusion.  
[
2424] C&L made no attempt to identify Castor’s overall exposure on the YH loans,  
although information recorded in C&L’s AWPs indicated that at least a half of Castor’s  
loan portfolio was connected to the YH group.  
[
2425] Wightman testified that he did not consider it appropriate to look at the entire YH  
connection and have a careful analysis performed of the collectability of those loans and  
the ability of those loans to service debt «because it was all gone through by the staff  
before»2  
709  
.
[
2426] As Wightman was the only member of the C&L audit team that had knowledge of  
the global portfolio, the fact that he failed to recognize his responsibility to address  
Castor’s global exposure to the YH group at the year-end meetings with Stolzenberg, is  
inexcusable.  
[
2427] Wightman was made aware, at least as early the 1986 audit, that there were loan  
exposures that needed to be considered on a global basis: for example, with respect to  
the TSH. Despite the information brought forward to him in the Inter-Office MAPs,  
Wightman never integrated this information with his knowledge of the Montreal loan  
portfolio. The exposures on projects such as the TSH, the CSH and MLV were never  
really addressed on a global basis with Stolzenberg. This is namely evidenced by  
Wightman’s attempt to aggregate related loans in the notes he allegedly made during or  
shortly after to the wrap-up meeting for the 1990 audit (wrap-up meeting held a week  
2
710  
after the date of the Inter-Office MAPs for 1990).  
[
2428] The final resolution of audit issues at the level of the engagement partner is a  
2711  
and represents the final exercise of professional  
very significant audit procedure  
judgment, at the highest level. The only detailed summary notes of the wrap-up  
meetings for the relevant period (1988, 1989 and 1990) that can be found in the AWPs  
are notes relating to the 1990 audit. For 1988 and 1989 Wightman sustained he did not  
2709  
2710  
2711  
Wightman, March 10, 2010, pp. 30-31.  
PW-1053-12, seq. pp. 76-93; PW-1053-71, seq. pp. 45-49  
Selman, June 2, 2009, pp. 14-15.  
500-05-001686-946  
PAGE: 502  
2
712  
This explanation is surprising to  
consider the notes useful, and he discarded them.  
say the least.  
1990 wrap-up meeting  
[
2429] Smith testified that he attended a portion of the wrap-up meeting for the 1990  
audit with Stolzenberg and Wightman. This was his only meeting with Wightman in the  
context of any audit. In fact, over a period of 11 years, Smith’s meetings were always  
held with junior auditors. 2  
713  
[
2430] When Smith walked into the meeting on February 15, 1991, Wightman was  
aware that «there was a potential problem of approximately two hundred and seventy-  
five (275) million dollars relating to various loans in the portfolio, notably the Maple Leaf  
Village loans, the hotel loans for Topven on the Skyline Toronto and Calgary, and  
2
714  
.
relating to the forty (40) million dollars of loans that were just booked»  
[
2431] Prior to this wrap-up meeting with Stolzenberg, Wightman knew that the junior  
staff had identified $133 million of unsecured and doubtful loans in the Montreal portfolio  
alone, and that $40 million of that amount had been identified as representing the  
2
715  
aggregate of nine loans made in the last few weeks of the year.  
•
At trial, Wightman denied having seen this schedule stating that he rather  
2716  
However, on  
relied on the manager’s summation of the information.  
discovery, he acknowledged having seen the schedule by justifying why he  
2
717  
did not view the accounts as doubtful despite this listing by the auditors.  
Contrary to his assertion at trial, he also admitted that he did not discuss with  
the audit manager why he wrote “MAP” on the working paper, E-65C that  
2
718  
listed these $133 million in unsecured loans.  
•
The Court concludes that Wightman had seen the schedule and was fully  
aware of the situation.  
[
2432] A number of the projects were discussed, and then Smith was dismissed from  
2719  
the meeting prior to any discussion of the $40 million of new unsecured loans . At  
that point, Smith was certain that there was a major problem with the audit.  
Wightman indicated to me that he wanted to have further discussions with Mr.  
Stolzenberg alone and that I was no longer required, and as a result, I was  
2712  
2713  
2714  
2715  
2716  
2717  
2718  
2719  
Wightman, February 11, 2010, pp. 141–142.  
R. Smith, May 14, 2008, pp. 83–84.  
Ron Smith, May 14, 2008, pp. 103-105  
PW-1053-15, seq. pp. 128–131.  
Wightman, February 26, 2010, p. 68.  
Wightman, September 29, 1995, pp. 77-78, 84-85.  
Wightman, September 29, 1995, pp. 198-199.  
Ron Smith, May 14, 2008, p.103-106  
500-05-001686-946  
PAGE: 503  
dismissed from the meeting and that's the end of the meeting, I left the meeting  
and I thought that we had a major problem with our portfolio in leaving that  
meeting and I went down to meet with Dragonas and Goulakos in the Wost  
offices within our offices, and I informed them that I thought that we weren't  
going to get our audit this year, that there were major problems indicated,  
and that I was prepared to work all week-end, if there were more questions to  
be decided, or that the final restructuring was finally going to take place within  
York-Hannover and Castor. I had been pushing Mr. Stolzenberg for, you know,  
restructuring of York-Hannover a number of years, and while attempts had been  
made, it was moving very slowly at that point, and I thought that well, now, now  
the auditors are going to push that on us and it's going to be a major situation  
where we do restructure from this point onwards.2 (our emphasis)  
720  
[
2433] Later that evening, at a dinner he attended with his wife and where Wightman  
and Stolzenberg were also present, Smith was surprised to learn that the issues had  
2
721  
.
been settled and that the audit was complete  
After about fifteen (15) minutes of sitting down, I got up and walked to the  
washroom and in walks Mr. Wightman. And Mr. Wightman indicated... I asked  
Mr. Wightman what had transpired and he just indicated to me that the audit  
process was finished, everything had been settled and the audit was over  
and completed. That somewhat surprised me at that point in time, after having  
left the meeting, I certainly felt that we had major issues that were going to have  
2722  
to be discussed.  
(our emphasis)  
I went back to my table with my wife and within another fifteen (15) minutes, Mr.  
Stolzenberg walked in, and they were round tables, so his back was with me,  
(
inaudible), and I turned around as soon as he sat down and asked "What's  
going on here, did we go through the audit?", and he indicated "Yes,  
everything has been settled, the audit process is over, it has been  
completed, the statements will be published shortly, let's get over to  
2723  
party".  
(our emphasis)  
[
2434] The Courts finds Ron Smith’s testimony relating to the 1990 wrap-up meeting  
credible and reliable. Wightman’s testimony about same is self-serving and not reliable.  
Conclusion  
[
2435] At the stage of the audit where the most significant exercise of professional  
judgment was required, no such judgment was exercised.  
2720  
2721  
2722  
2723  
Ron Smith, May 14, 2008, pp. 105-106  
Ron Smith, May 14, 2008, pp. 105-108  
Ron Smith, May 14, 2008, p. 107  
Ron Smith, May 14, 2008, p. 107  
500-05-001686-946  
PAGE: 504  
Steps not taken by C&L during their audits  
[
2436] C&L failed to perform their professional services in accordance with the  
standards of the day, in accordance with GAAS. Such failures were blatant, pervasive  
and inexcusable.  
[
2437] C&L audit planning failed to address, among other matters, the concentration of  
borrowers and projects, and the interconnected loans made in Europe and in Canada.  
[
2438] C&L ignored the changing nature of their client’s business and failed to  
implement an audit plan that was appropriate in the circumstances. In effect, C&L failed  
2
724  
and performed  
to perform an audit pertaining to a short-term or a long-term lender,  
no meaningful audit in respect of Castor’s ever increasing non-performing loan portfolio.  
[
2439] C&L had the obligation to assess the credit monitoring process and to verify that  
Castor’s borrowers were complying with their loan covenants. During all the relevant  
2
725  
years, 1988 to 1990, C&L failed to perform such elementary auditing procedures.  
Therefore, C&L completely failed to consider the implications for Castor’s borrowers to  
be systematically in default.  
[
2440] During the three relevant years, C&L failed to obtain sufficient appropriate audit  
evidence in respect of the collectability of the loans and of the ability of Castor’s  
borrowers and guarantors to satisfy their obligations to Castor. Furthermore, in most  
cases, C&L obtained no sufficient appropriate audit evidence at all in cases where loans  
were not secured by mortgages on real estate.  
2
726  
[
2441] C&L failed to consider the purpose of the loans  
and whether funds were being  
advanced to borrowers to create value. Rosen described the following as the most  
basic audit question: «What do you intend to do with the money should I loan it to  
2
727  
C&L never asked themselves that question, nor did they ask Castor, for that  
you?«  
matter, nor did they ask any other questions to find out why Castor was continuing to  
transact with its largest borrower when it could not pay interest or fees and did not have  
tangible security to offer to collateralize the corporate loans.  
[
2442] C&L failed to seek or obtain reliable financial information regarding his various  
borrowers that would have enabled them to reach a conclusion as to the borrowers’  
2
728  
capacity to pay and as the carrying value of the loans.  
2724  
2725  
2726  
2727  
2728  
PW-3034, pp. 9-20  
PW-2908, Vol. 1, p. 4-B-13; Vance, March 13, 2008, pp. 179–186; Vance, March 6, 2008, pp. 79-84  
PW-3033, Vol. 1, p. 44  
Rosen, February 3, 2009, p. 49.  
D-1295, p. 363; Selman, June 4, 2009, p. 230; June 10, 2009, pp. 65-72  
500-05-001686-946  
PAGE: 505  
[
2443] Although C&L understood that Castor’s practice of capitalization of interest was a  
“
hot topic” because of the possibility that borrowers could not meet their obligations,  
they did not adjust their audit of the loans to obtain information as to why the borrowers  
were failing to meet their loan covenants (as had been recommended by Higgins in the  
peer review).  
[
2444] C&L assigned the most junior members of the audit team to audit the loans, and  
information that appeared in the AWPs of prior years were mechanically, and often  
erroneously, brought forward to later audit years without any analysis or critical review.  
In addition to the overwhelming GAAS errors on the valuation of the loans, the way the  
AWPs were documented was, in and of itself, a breach of GAAS, which should have  
been apparent to the reviewers.  
[
2445] The audits appear to have been limited to a mechanical review of commitment  
letters and promissory notes, and to the filling out of forms without thought or analysis.  
2
729  
is corroborated by  
The superficial review conducted by C&L, as described by Smith,  
2
730  
C&L  
the testimony of the junior auditors who worked on the investment sections.  
never questioned why one-year loans that were non-performing were routinely renewed,  
from year to year, and not repaid by the borrowers.  
[
2446] Superficiality2731 and brevity characterized the audits.  
[
2447] The auditors failed to consider the numerous red flags that were readily apparent  
2
732  
regarding the portfolio and failed to ask for information that was available to them.  
[
2448] C&L’s audit approach never changed, even when negative information was  
2733  
provided. No further questions were put to Castor management.  
[
2449] The auditors placed inappropriate and undue reliance upon representations of  
management, notwithstanding guidance of section 5300 of the Handbook on “audit  
evidence”, and namely guidance of sections 5300.08, 5300.19, 5300.20, which  
stipulate:  
0
8. Sufficient appropriate evidence should be obtained to enable the auditor to  
evaluate whether management’s accounting estimates are reasonable within the  
context of the financial statements as a whole.  
When the auditor is unable to obtain sufficient appropriate evidence to provide  
reasonable assurance that management’s accounting estimates are reasonable  
2
729  
730  
Ron Smith, September 5, 2008, p. 47  
2
1
988: Séguin, December 12, 1995, pp. 283-295, October 25, 1996, pp. 60-68.; 1989: Belliveau, April  
1
, 1996, pp. 69-96, 109; 1990: Quesnel, November 23, 1995, pp. 176-188, November 24, 1995, pp.  
02-108  
1
2731  
2732  
2733  
Ron Smith, May 14, 2008, pp. 88-102, 230-231; September 5, 2008, p. 47  
R. Smith, September 17, 2008, p. 162  
R. Smith, September 16, 2008, pp. 213-218  
500-05-001686-946  
PAGE: 506  
within the context of the financial statements as a whole or has obtained  
evidence that refutes management’s estimates, the auditor would discuss the  
findings with management and consider the effect on his or her opinion.  
2
0. Generally, evidence developed by the auditor is more reliable than evidence  
obtained from the enterprise or third parties, documentary evidence is more  
reliable than oral evidence and external evidence is more reliable than internal  
evidence. The auditor may gain increased assurance when audit evidence  
obtained from different sources or of a different nature is consistent. In these  
circumstances, he may obtain a cumulative degree of assurance higher than that  
which he attaches to the individual items of evidence by themselves. Conversely,  
when audit evidence obtained from one source is inconsistent with that  
obtained from another, the reliability of each remains in doubt until further  
procedures have been performed to resolve the inconsistency.  
2
6 Enquiry consists of seeking appropriate information of knowledgeable  
persons within or outside the enterprise. Enquiries may range from formal written  
enquiries addressed to third parties to informal oral enquiries to persons within  
the enterprise. (…) A response from a person within the enterprise does not  
usually constitute sufficient appropriate audit evidence in itself but requires  
corroboration. Such corroboration may include making further enquiries from  
other appropriate sources within the enterprise. Consistent responses from  
different sources provide an increased degree of assurance. (…)(our emphasis)  
[
2450] As Anderson writes:  
Enquiry of management and employees is applicable to almost every financial  
statement figure to be verified even though oral representations from persons  
within the organization being audited must be treated as the least reliable  
form of audit evidence. All representations of material consequence must  
therefore be corroborated by other evidence.2 (our emphasis)  
734  
[
2451] Ford failed to document either the levels of materiality, or the risk factors used in  
2
735  
determining the nature, extent and timing of the audit procedures.  
[2452] C&L failed to bring forward information or representation made to them.  
[
2453] For each of the three relevant years, C&L failed to detect several material  
transactions that improved dramatically and artificially Castor’s balance sheet and  
income statement.  
2
734  
735  
PW-2908, vol. 1, chapter 6, page 6-34  
2
Ford, December 8, 2009, p. 127. See also PW-1419-2A, Section 5145.05  
500-05-001686-946  
PAGE: 507  
[
2454] At every phase of the audit work, C&L failed to exercise professional judgment or  
they exercise it improperly, without thought or critical analysis.  
[
2455] In general terms, in the 1988, 1989 and 1990 audits, breaches of GAAS  
originated from or resulted in:  
•
•
•
•
The failure to aggregate loans in Montreal and Europe and in relation to each  
project.  
The failure to assess the financial ability of borrowers (and guarantors) to repay  
their loans.  
The failure to obtain financial statements for each borrower and guarantor (or for  
entities whose assets served as loan collateral).  
The failure to review and assess the reasonableness of appraisal assumptions  
and to require up to date appraisal reports.  
•
•
The failure to select the highest risk loans related to a project to be audited.  
The failure to analyze properly what security was available to Castor for each  
loan and what liabilities of a project (or liabilities of a borrower) ranked in priority  
to Castor’s security.  
•
The failure to obtain sufficient appropriate audit evidence for the carrying value of  
unsecured loans and loans secured by personal guarantees, corporate  
guarantees, pledges of shares, assignments of receivables and other non-real  
estate assets.  
•
•
•
•
The failure to review correspondence files in relation to loans and to assess  
Castor’s credit granting and monitoring procedures.  
The failure to determine whether interest and fees were being paid in cash by  
each borrower or being capitalized in some manner.  
The failure to identify and probe unplanned capitalization of interest and  
breaches of covenants by borrowers.  
The failure to question large receipts of cash payments at year-end (as opposed  
to small sums received during the first eleven months) and the failure to generally  
perform window dressing procedures.  
•
•
The failure to carry forward important information gathered in prior years.  
The failure to consider the ever growing portion of loans not directly secured by  
real estate.  
500-05-001686-946  
PAGE: 508  
•
•
The failure to properly complete loan questionnaires.  
The mechanical use of audit working papers carried forward from previous years  
without tracing information to supporting documentation, and other errors which  
evidence a lack of understanding, a lack of care and a robot-like propensity to  
copy information from the previous audit working papers, sometimes erroneous  
and out of date.  
!
For example, an incorrect loan description, such as a loan being a  
nd mortgage, was repeated year after year even though such  
2
description was wrong and inconsistent with the audit confirmation  
letters received by C&L.  
•
The failure to take account of the publicized loan to value ratio of Castor, which  
was 75%-80%, especially after C&L noted its importance in the audit of the Les  
Terrasses loans for 1986.  
•
•
The acceptance of changes to notes 2, 3 and 4 without sufficient appropriate  
audit evidence after having carried out their own audit procedures.  
The use of a statement of changes in net invested assets in contrast to a  
statement of changes in financial position contrary to the specific requirements of  
GAAP.  
•
The failure to perform audit procedures in connection with undisclosed related  
party transactions.  
•
The failure to exercise professional judgment with an objective state of mind (in  
connection with the carrying value of loans, loan loss provisions, related party  
transactions, economic dependence, maturities of loans receivable and payable,  
disclosure of a proper statement of changes in financial position, disclosure of  
restricted cash).  
•
•
•
•
•
•
The failure to appropriately document work performed.  
The failure to control the confirmation process.  
The failure to confirm the $100 million debentures in Montreal.  
The failure to identify the concentration of risk and economic dependence.  
The failure to identify and disclose restricted cash.  
The failure to implement recommendations made by their own quality control  
department.  
500-05-001686-946  
PAGE: 509  
•
The failure to comply with their own technical materials.  
•
The failure of the engagement partner, during the year end wrap-up meeting, to  
obtain adequate information, to analyze properly the one obtained, to ask  
additional questions and to test such information.  
•
[
The failure of the engagement partner, further to the year-end wrap-up meeting,  
to request that further audit work be performed.  
2456] C&L’s audits of the carrying values of the loans appear to have been nothing  
more than summarily (but not in all cases) asking Smith if the loans were “good” or “ok”.  
Smith testified that because Castor had not taken a loan loss provision on the loans, it  
was the company’s position that the loans were good and he merely reflected such  
position. Selman acknowledged that asking management if a loan is “good” adds  
nothing to the audit process if no additional requests for information are made by the  
auditor.  
[
2457] In practical terms and in regard to specific loans or projects that were reviewed  
or should have been reviewed during the 1988, the 1989 or the 1990 audit, not  
complying with GAAS entailed the following effects or consequences.  
1988  
MLV  
2458] C&L failed to aggregate all CHL and CHIF loans secured by the assets of the  
[
MLV project. The inter-office memorandum from the overseas audit staff stated that this  
2
736  
Even though a tick mark suggests that  
aggregation had to be performed in Montreal.  
this item was “cleared”, the Court finds that it was not.  
•
•
The loan analysis performed2737 does not aggregate all the loans.  
Examinations of audit staff members reveal that the work was not performed.2738  
[
2459] In connection with the Castor Montreal loans, C&L failed to include Loan 1105 to  
MLVII in the amount of $3.1 million, Loan 1048 to YHLP in the amount of $14 million  
and Loan 1125 to KVWIL in the amount of $7.2 million in their analysis.  
th  
[
2460] The draft (7 draft) financial statements of MLVII, still not finalized 16 months  
after the balance sheet date, reflected serious financial difficulties in addition to a “future  
operations” note. These financial difficulties were a major and obvious “red flag” to any  
2736  
2737  
2738  
PW-1053-22, sequential page 184.  
PW-1053-23 sequential page 153 (E72).  
For example, Séguin, December 12, 1995, pp. 128-135.  
500-05-001686-946  
PAGE: 510  
competent auditor.2  
739  
The auditors ought to have assessed how a project in such a  
difficulty, and a borrower so reliant on financial support could possibly service its debt to  
Castor.  
[
2461] The audit working papers (“AWPs”) themselves reveal errors, which illustrate the  
failure to trace information to supporting documentation or a lack of understanding.  
Some of those errors are convincing evidence of a lack of analysis and of a mechanical,  
robot-like, propensity to copy or bring forward information from previous years’ AWPs  
without any thought.2  
740  
[
2462] The use of appraisals was superficial and inadequate. Aside from copying the  
date of the appraisal, the name of the appraiser and the amount, no audit work was  
performed in relation to the assumptions which supported the out-of-date appraisal used  
2
741  
This Mullins appraisal was issued in 1983 and the financial  
for the 1988 audit:  
position of MLV had deteriorated substantially since that date. The audit staff did not  
perform any procedures on the substance of the appraisal; they did not check if the  
2
742  
2743  
They should have.  
underlying assumptions still had any validity.  
[
2463] Section 5360 of the Handbook “Using the work of a specialist” contains guidance  
to auditors who rely on the work of a specialist (an appraiser, for example) as audit  
evidence when conducting an examination in accordance to GAAS. Paragraphs  
2744  
360.09. 5360.12 and 5360.14 state:  
5
0
9. When the auditor plans to use the work of a specialist as audit evidence, he  
should have or obtain reasonable assurance concerning the specialist’s  
reputation for competence.  
1
2. The appropriateness and reasonableness of the assumptions and methods  
used by the specialist are the responsibility of the specialist. Ordinarily, the  
auditor may accept the specialist’s judgment and work in this regard unless the  
report of the specialist, the auditor’s communication with the specialist, or the  
auditor’s knowledge of the client’s business lead him to believe that the  
specialist’s assumptions or methods are unreasonable in the  
circumstances. If the assumptions or methods used by the specialist appear to  
be inconsistent with those used in the prior period, the auditor would enquire into  
the reason for the apparent inconsistency.  
2
2
2
739  
PW-2908, Vol. 2, A-7 and A-8.  
740  
741  
PW-2908, Vol. 2, pp. A-15 to A-20.  
PW-1053-23, seq. p. 154; R Smith, May 16, 2008, pp. 154-155; (PW-493); Vance, April 9, 2008, pp.  
114-115.  
2742  
2743  
2744  
Séguin, December 12, 1995, pp. 170-176.  
Vance, PW-2908, vol. 1, pp.6-2 to 6-21; Froese, PW-2941, vol. 1, pp.163 and following  
PW-1419-1A (1988); PW-1419-2A (1989); PW-1419-3A (1990)  
500-05-001686-946  
PAGE: 511  
1
4. When the auditor uses the work of a specialist, he should:  
(
a) Satisfy himself that, based on his knowledge of the business and his  
knowledge of the specialist’s methods, assumptions and source data, the  
findings appear to be reasonable; and  
(
b) Obtain reasonable assurance that:  
(
i) Accounting data provided by the client to the specialist is appropriate;  
and  
(
ii) The specialist’s findings support the related assertions in the financial  
statements. (our emphasis)  
[2464] In one of its 1986 publications, the AICPA provided the following guidance:  
The auditor ordinarily relies on the work of the appraiser unless the auditor’s  
procedures lead to the belief that the appraiser’s methods, assumptions, or  
findings are unreasonable.  
The auditor should test the accounting data provided by the client to the  
appraiser. In addition, the auditor may sometimes need to further enquire or to  
perform additional procedures, such as independently verifying significant data  
contained in the appraisal report, examining documents and other information  
used by the appraiser, speaking with the appraiser, and correlating the  
appraiser’s findings to other available audit evidence, or engaging another  
appraiser to evaluate the reasonableness of the valuation data.2  
745  
[
2465] In summary, before concluding that an appraisal could be used as appropriate  
audit evidence, C&L had to :  
o Determine that the appraiser’s reputation and qualification were  
acceptable and to do it, they had to know who the appraiser was.  
o Be satisfied that the appraiser had set forth the rationale inherent in his  
value estimates,  
o Understand the appraiser’s approach and be satisfied that such an  
approach was reasonable in the circumstances.  
o Determine the reasonableness of the appraiser’s conclusions in light of  
current information regarding physical characteristics or actual operations  
of the property.  
2745  
PW-2953  
500-05-001686-946  
PAGE: 512  
[
2466] All of the above is consistent with C&L’s own technical guidance. In its December  
1, 1982 publication relating to the valuation of real estate holdings, C&L wrote:  
3
If an appraisal is available, we should not accept it as a basis for establishing  
NRV without considering the following:  
i) the qualifications and apparent objectivity of the appraiser;  
ii) the purpose of the appraisal;  
iii) the apparent appropriateness of the methods and assumptions used;  
and  
iv) the apparent validity of the conclusions reached.2746  
[
2467] If they had done the appropriate work in relation to the MLV appraisals they had  
on hand, C&L would have found the following.  
•
•
•
The appraisals assumed that substantial renovations would be made to the MLV  
project.  
In order to maintain the Sheraton brand name, renovations to the MLV hotels  
were greatly needed.  
The discounted cash flow forecast used in the Mullins appraisal, and the Hughes  
appraisal were not applicable since the cash flow projections assumed that  
substantial renovations would be made, and they were not.  
[
2468] From the testimony of the audit staff, it appears that C&L never analyzed the  
2747  
assumptions contained in those appraisal reports.  
[
2469] Without the financial support of Castor, the MLV project was not generating  
sufficient operating income to even meet its first mortgage payments. In 1988, the  
project generated $4 million of net income before debt, but had annual interest  
obligations alone of $20.4 million. Real estate taxes were paid one day before the City  
2
748  
No money was available from YH  
of Niagara would have sold the property for taxes.  
to support the MLV project.2  
749  
[
2470] In evaluating the YHLP loan receivable of $10 million from MLVII, the audit staff  
relied upon an out of date valuation of the shares of MLVII apparently carried out by  
2
746  
747  
PW-1420, AM-50  
2
Séguin, December 12, 1995, pp. 173-176; Belliveau, April 2, 1996, pp. 276-278; Quesnel, November  
2
4, 1995, pp. 130-134; Mitchell, April 25, 1996, pp. 115-118; April 24, 1996, pp. 181-185; Wightman,  
September 15, 1995, pp. 191-196 – Wightman didn’t expect the audit staff to read the entire  
appraisal.  
2
748  
749  
Prychidny, October 15, 2008, pp. 50-52; PW-1053-23, seq. p. 163 (note 3a).  
Prychidny, October 15, 2008, p. 111; October 14, 2008, pp. 49-52, 72-75, 83-85. 88-90.  
2
500-05-001686-946  
PAGE: 513  
Thorne Riddell in 1984. The receivable secured YHLP loan 1048 in the amount of $14.1  
million. There is no evidence that the audit staff even saw this valuation during the 1988  
audit work. Furthermore, the receivable in the amount of $10 million does not appear on  
2
750  
the draft audited financial statements of MLVII, which were contained in the AWPs.  
[
2471] By way of example, in evaluating the collectability of the loan made to KVWIL in  
the amount of $7.2 million, Séguin did not obtain financial statements or any other  
financial information on the borrower or on the guarantor, Wersebe. The only  
information to support his evaluation of the carrying value of the loan was the purported  
statement made by Smith that this loan was good. Selman opined it was not enough.  
th  
[
2472] Save for the 7 draft of the unaudited financial statements of MLVII, the auditors  
did not obtain any financial statements of borrowers. According to Séguin, it was not  
necessary to obtain financial statements or other financial information concerning a  
borrower.2  
751  
[
2473] In fact, there was no basis to support the decision of the auditors to accept the  
carrying value of unsecured loans or loans secured by pledges of shares, accounts  
receivable or other financial assets, which could only be evaluated through the provision  
of financial information.  
[
2474] The failure to obtain financial statements of borrowers and of entities whose  
2752  
Moreover, the failure  
shares were pledged as collateral was a clear breach of GAAS.  
2
753  
to adequately document the AWPs is itself a breach of GAAS.  
[
2475] In relation to those MLV loans which were not secured directly upon real estate,  
C&L failed to obtain SAAE. Selman admitted in similar circumstances that the  
2
754  
documentation would not indicate that C&L «completed GAAS».  
[
2476] All the above was aggravated by the failure of Wightman to follow up on  
information and representations of management made to him in prior years and to  
question management properly and to follow up on information provided by  
management during the year-end wrap-up meeting.  
2750  
2751  
2752  
2753  
2754  
PW-1053-23, seq. pp. 155-166. See PW-2908, Vol. 2, A-10.  
Séguin, December 11, 1995, pp. 86-88.  
Selman, May 26, 2009, pp. 77-78, 97-98, 100-102.  
Selman, June 1, 2009, pp. 81-82; PW-2908, Vol.1, p. 5-30.  
Selman, May 26, 2009, p. 92; PW-2908, Vol. 1, p. 5-30.  
500-05-001686-946  
PAGE: 514  
MEC  
[
2477] C&L failed to take into account, and to aggregate, various loans which were  
2755  
associated with the MEC project, such as the loan to 612044.  
[
2478] C&L failed to consider why interest was being capitalized on some MEC loans  
where no such capitalization had been foreseen in the loan agreements.  
[
2479] C&L failed to assess the financial ability of the various borrowers to pay,  
especially in respect of the high risk equity loans. Even though such information was  
essential to determine the collectability of the equity loans, C&L did not request nor saw  
any financial statements of YHDL, 97872 or 612044.  
[
2480] In 1988, the “Les Terrasses” project was refinanced and became the “MEC”  
project. C&L staff did not appear to have understood that the refinancing of the loans in  
connection with Les Terrasses was linked to the loans in connection with MEC. This  
2
756  
and was repeated in  
lack of understanding is evidenced in the AWPs for loan 1042,  
1
989 and 1990 by the process of blindly bringing forward the AWPs from previous  
years. As a result, C&L used erroneous loan figures for prior ranking loans, since the  
loans prior to the refinancing no longer existed.  
[
2481] C&L did not ask themselves why Castor financed the equity contributions of the  
owners of the project.  
[
2482] C&L failed to consider whether the assumptions contained in the MEC appraisal  
2757  
were realistic.  
that they relied upon  
[
2483] C&L failed to properly audit for related parties. C&L failed to ask even the most  
basic of questions to ascertain who the owners of 612044 and 97872 were. The closing  
2
758  
binders demonstrated that Stolzenberg was the incorporator and a director of 97872  
2
759  
and numerous newspaper articles disclosed his ownership interest.  
Reading Hunt’s  
testimony, the supervisor of the CHL 1990 audit that worked on the related party  
section, enlightens: lack of knowledge of the client’s business, lack of planning and lack  
2
760  
of supervision are clearly part of the reasons for such a failure.  
[
2484] Finally, all the above was aggravated by Wightman’s own failure to plan and to  
supervise the work done by his teams, and by his failure to review their work and their  
audit working papers.  
2755  
2756  
2757  
2758  
2759  
2760  
Wightman, October 6, 1995, pp. 79-88.  
PW-1053-23, seq. pp. 213-214.  
PW-1108A  
PW-1102A-6; PW-2908, Vol. 1, p. 4-E-32.  
PW-2925, PW-2926.  
Hunt, March 28, 1996, pp. 127-132.  
5
00-05-001686-946  
TSH  
2485] The project had been financed by Castor since the early 80s. C&L knew that it  
PAGE: 515  
[
was refinanced a number of times, including in 1988, but C&L failed to investigate if this  
2
761  
was an indicator that the project was in trouble.  
[
2486] Because the refinancing increased Castor’s exposure from $75 million, at year  
end 1987, to more than $110 million, in 1988, C&L should have, yet did not, consider  
the increased risk.2  
762  
And again, the point I would just make is the knowledge, is that the... it's getting  
very tight, with respect to the loan and the collateral, especially when estimates  
are given and used in putting in the value, and certainly an auditor planning for  
nineteen eighty-eight (1988), this is one loan that cries out for inspection in  
nineteen eighty-eight (1988).2  
763  
[
2487] Prior to 1988, C&L knew about the relationship between Lambert and Topven:  
this information should have been brought forward each year, but it was not. Smith  
confirmed the relationship when he explained the major refinancing to the junior auditor  
2
764  
There is a  
for the 1988 audit, but the latter failed to take account of this information.  
2
765  
reference to a refinancing in the AWPs but without any detailed information.  
[
2488] As a result of a lack of planning, C&L failed to aggregate the TSH-related loans,  
which it should have. As a consequence, C&L did not realize that Castor’s exposure on  
the project at year end 1988 (and also at year-ends 1989 and 1990) was well in excess  
2
766  
C&L relied on Management and ignored the information  
of value estimated by Gillis.  
in their own AWPs. Wightman admitted that the information was in the AWPs and was  
2
767  
not concealed from C&L by Management.  
[
2489] C&L knew that Castor marketed itself by asserting to potential and actual  
investors and lenders that their policy was not to exceed 75% to 80% of the estimated  
market value.  
[
2490] C&L should have realized that Castor was lending in excess of 80% of the  
estimated market value, and often at greater than 100% of such value and considered  
the negative implications.2  
768  
2761  
2762  
2763  
2764  
2765  
2766  
2767  
2768  
PW-2941, Vol. 1, p. 151–152; Vol. 2, p. 88.  
Vance, April 8, 2008, pp. 41-45, 95–96.  
Vance, April 8, 2008, p. 95  
Ron Smith, September 5, 2008, pp. 34-35.  
PW-1053-23, seq. p. 168  
PW-423  
Wightman, September 18, 1995, pp. 103–107.  
Vance, April 21, 2008, pp. 191–194, referring to Wightman’s testimony on discovery, October 10,  
1
995, pp. 169, 174, 176; September 21, 1995,62–77, 84-85; R. Smith, October 2, 2008, pp. 7-14;  
PW-1053-38, seq. p. 82 (for 1988).  
500-05-001686-946  
PAGE: 516  
[
2491] C&L only selected the first and second mortgage loans to Topven (1988) for  
detailed review for the 1988 audit and omitted the unsecured grid note loan and the  
Lambert loans. These were errors in the performance of auditing that should have been  
2
769  
identified by the reviewer, had a proper review been done.  
[
2492] C&L should have identified that the increase in the loan balances each year was  
2770  
due to the capitalization of interest.  
[
2493] The loan documents reviewed by C&L called for the monthly payment of interest  
2771  
The mortgage and loan ledger cards reviewed by C&L, as well as the  
in cash.  
accounting records, disclosed that the TSH loans were all being capitalized, including  
nd  
2772  
the 2 mortgage loan from CHIF.  
[
2494] Similarly, the systems’ testing performed by C&L indicated more than $2.7 million  
of interest that was recorded as received but that could not be traced to either cash  
receipts or deposit slips for the first mortgage loan to Topven (1988). Although the same  
person reviewed this work as well as the investment section, there was no investigation  
2
773  
as to this apparent discrepancy (as to whether the interest terms were being met).  
The audit manager could not explain why this was not brought forward to the  
engagement partner.2  
774  
[
2495] C&L did not consider why an operating hotel could not generate sufficient  
revenue to allow it to pay interest and fees to Castor. The TSH was not a construction  
project or a development project.  
[
2496] With respect to the overseas audit, Ford was unaware that Castor Montreal held  
2775  
Ford sustained that she reviewed the interest received and  
the first mortgage.  
accrued for the 1988 audit, as had been done in the prior year: then, the audit work had  
been documented but in the 1988 audit it was only embedded in her brain, as Ford  
2
776  
Again, Ford’s testimony is neither reliable nor credible. Ford erroneously  
said.  
nd  
believed that interest on the 2 mortgage Topven (1988) loan was being paid in  
cash.2  
777  
2
2
2
769  
770  
771  
PW-1053-24, seq. pp. 347–361 (Audit Plan); PW-1053-23, seq. p. 263 (Confirmation Letter), Picard,  
December 6, 1995, pp. 109–117; Mitchell, April 24, 1996, pp. 197–203  
E.g. PW-167D which confirms that the reason that the unsecured grid note loan (#1148) increased  
from $3.9M to $7.6M in 1988 was due to capitalized interest.  
st  
PW-1087-1 (Skyview, 1 mortgage); PW-1087-7 and PW-1087-8 (321351, pledge of shares): PW-  
1
087-10 (Skyeboat, pledge of shares), and PW-1087-6 (Skyview grid note).  
2772  
2773  
2774  
2775  
2776  
2777  
PW-167R, PW-167Q, PW-167T.  
PW-1053-24, seq. pp. 321-322.  
Mitchell, April 23, 1996, pp. 147–150, 159-160, 181–186.  
Ford, November 7, 1995, pp. 161–165.  
Ford, November 8, 1995, pp. 161–164.  
Ford, November 8, 1995, pp. 147–148.  
500-05-001686-946  
PAGE: 517  
[
2497] In contrast to the prior years, the Lambert loans were not selected for detailed  
2778  
review by Ford in 1988 (they were not selected either by her in 1989 and 1990).  
2
779  
Given the risk on these loans  
and considering the questions on the project that had  
been raised in earlier years, these loans needed to be evaluated. Ford’s error in  
2
780  
and  
excluding these loans from her sample was compounded by the failure to plan  
2
781  
the failure to review properly her work.  
[
2498] C&L had been provided the audited financial statements of Topven for 1983,  
1
984 and 1985, which disclosed a rapidly deteriorating financial condition. In 1988,  
same for 1989 and 1990), C&L did not investigate why they were not provided with  
subsequent financial statements for either Topven or Topven (1988).  
(
[
2499] The fact that the 1986 interest on the Lambert loans was not paid until 1988  
indicated to Ford a “slow payer”. Nevertheless, Ford neither assessed the financial  
2
782  
condition of the borrower, nor questioned whether the loans were collectible.  
[
2500] Ford never performed a security review of the loans to Lambert and there is no  
SAAE that these loans were adequately secured.  
[
2501] At discovery, Ford asserted that financial statements of Lambert were available  
2783  
At trial, Ford  
to her although her AWPs do not record any mention thereof.  
“
improved” her prior testimony by asserting that the financial statements of Lambert she  
2784  
Twenty years after her 1989 audit work, it is  
saw “were of a current nature”.  
remarkable that Ford conveniently recalls the “current nature” of those statements while  
looking at borrowers’ financial statements was not something she did as an audit  
procedure: Ford’s testimony2 is neither reliable nor credible.  
785  
2
786  
[
2502] The loan documents reviewed by C&L  
called for the annual provision of  
financial statements prepared in accordance with GAAP by a Chartered Accountant.  
2
778  
779  
Ford, November 14, 1995, pp. 81–82; December 11, 2009, pp. 133-134.  
2
For 1988, Lambert was indebted to Castor for $43.4M; $39.4 for 1989; and $40.1 for 1990. The  
Lambert loans had been on Castor’s books since 1984; Lambert was not meeting its contractual  
obligations with respect to payment of interest.  
2780  
Ford testified that when she performed the 1988 audit she was unaware that Lambert was connected  
to the TSH despite the information recorded in the prior years’ AWPs (November 7, 1995, pp. 173–  
174).  
2781  
2782  
2783  
2784  
2785  
2786  
Martin, December 18, 1995, pp. 12–14; September 25, 1996, pp. 41–42.  
Ford, November 7, 1995, pp. 166–172.  
Ford, November 14, 1995, pp. 59, 63, 67.  
Ford, December 7, 2009, pp. 173–174.  
Ford, November 14, 1995, pp. 79-85.  
See for example, the LIQ and LEQ (PW-1053-23, seq. pp. 168–170) contain an “x” which, for that  
year, indicates that the auditor traced the information to the “original mortgage or loan document”  
500-05-001686-946  
PAGE: 518  
There is no indication that C&L ever requested such statements with respect to their  
review of the project loans.2  
787  
[2503] Contrary to GAAS, C&L never considered the assumptions on which the Gillis  
appraisal value was based nor tested the reliability of the appraisal as audit evidence. It  
was not hidden from C&L that the appraisal was based on the completion of renovations  
within the year, on very optimistic income projections and on one sole valuation  
approach. Furthermore, C&L failed to note that the person who prepared the Gillis  
appraisal had not retained his professional accreditations at the time he issued this  
work.  
[
2504] C&L recorded a Management representation to the effect that the Constellation  
Hotel located near to the TSH was sold for approximately $115 million and “therefore,  
value for Skyline is most likely greater than value given above” without any independent  
verification of this representation and without considering the fact that the appraiser had  
already considered this transaction in reaching his estimate of value of $93 million for  
the TSH.  
CSH  
[
2505] C&L never planned to aggregate the loans connected to the CSH and therefore  
failed to identify the security deficiencies on the project in 1988 (same in 1989 and  
990).  
1
[
2506] C&L ignored the information in their own AWPs which identified the need to “tie-  
in” the connected loans. Defendants’ expert Selman agrees that this was a breach of  
GAAS, stating that Vance is correct when he opines that: «C&L audit planning failed to  
address among other matters, the concentration of borrowers and projects, and  
2
788  
interconnected loans made in Europe and in Canada …Calgary Skyline.»  
[
2507] C&L only selected the first and second mortgage loans to Skyview for detailed  
review for the 1988 audit and omitted the unsecured grid note loan and the loans  
secured by pledges of shares where there was a much higher risk that the loans were  
not collectible. There was no work performed by C&L to evaluate the value of the  
shares or the collectability of these loans; rather, C&L relied on Management  
representations with respect to value and collectability, i.e., that they were “good”.  
2
787  
788  
See, for example, Ford, November 15, 1995, pp. 174–177, where she admits that she knew that  
some loan agreements called for the provision of financial statements but she did not verify if they  
were provided as required.  
2
Selman, June 1, 2009, p. 145.  
500-05-001686-946  
PAGE: 519  
[
2508] The unaudited financial information indicates that going back to 1988, 321351  
2789  
Some of  
and Skyeboat both recorded significant deficits in their financial statements.  
these statements even refer to Castor and Lambert as affiliated companies.  
[
2509] The failure of C&L to review financial statements is a breach of GAAS. Had this  
step been followed, undisclosed related party transactions might have been  
2
790  
with respect to the CSH, as well as the poor financial condition of the  
uncovered  
borrowers which would have put in doubt the collectability of the loans.  
[
2510] There is no evidence that C&L reviewed the assumptions underlying the opinion  
on value by PKF. The report was prepared in February 1987 and anticipated that a  
major upgrade of the hotel would be finalized by February 1988, in time for the Calgary  
Olympics (and therefore could benefit from increased room rates and occupancy).  
Because C&L did not look at those assumptions, they did not realize that the values  
might not be reliable, even as early as February 1988, because the renovations had not  
been done.  
[
2511] Prior to 1988, C&L performed work on the $3.6 million vendor take back  
2791  
but never accounted for it in evaluating the exposure on the CSH project.  
guarantee  
C&L’s audit procedures should have ensured that they remain aware of its  
2
792  
Both of Defendants’ experts, Selman and Levi, initially asserted that this  
existence.  
2
793  
Levi  
was misrepresentation by management and a deception on the auditor.  
subsequently modified his Report and opinion, admitting that since the information was  
evident in Castor’s books and records, it was not hidden from the auditors and there  
2
794  
As admitted by Defendants’ expert Selman, this should have  
was no deception.  
been disclosed as a contingency in the audited consolidated financial statements each  
year until 1990 and, as it was not, constituted a financial statement misstatement (for  
2
795  
the statements 1985 – 1989, inclusive).  
OSH  
[
2512] In the case of loan 1049, the AWPs for 1988 (same for 1989) merely brought  
forward the loan information questionnaire (“LIQ”) from 1987. This LIQ evidenced that  
the loan originated in 1984. It incorrectly described the loan as a second mortgage  
notwithstanding the terms of the confirmation letters that were sent to C&L.  
2
789  
PW-465A, 321351, as at December 31, 1988; PW-466B, Skyeboat as at December 31, 1988; PW-  
4
65B, 321351, as at December 31, 1990; PW-466C, 321351, as at December 31, 1990.  
2790  
2791  
2792  
2793  
2794  
2795  
PW-2908, Vol. 1, p. 4-E-46; PW-3034, p. 53.  
See, for example, PW-1053-37, seq. pp. 19-20.  
PW-2908, Vol. 2, p. G-8.  
D-1295, p. 34, paragraph. 4.1.34; Selman, May 26, 2009, pp. 20-21; D-1347, p. 202.  
Levi, January 12, 2010, pp. 43-44.  
Selman, May 26, 2009, p. 20.  
500-05-001686-946  
PAGE: 520  
[
2513] In the case of loan 1152, C&L failed to value this loan or to even understand that  
it was associated with the OSH in 1988 ( same in 1989).  
[
2514] In the 1988 loan evaluation questionnaire (“LEQ”), C&L merely brought forward  
the LEQ from the previous year which contained references to appraisals from early  
985 that had been obtained at the time of the December 1984 financing.  
1
[
2515] In the case of the Mullins appraisal, it was predicated upon renovations being  
effected to the hotel. In the case of the General Appraisal Co., an appraisal of $5.6  
million, Smith explained that by 1988 through 1990, this appraisal was of little use since  
the furniture depreciates in value each year. Furthermore, there is a double counting  
2
796  
and the General Appraisal of Canada Limited  
error in that the Mullins appraisal  
appraisal2 both purport to appraise the furniture and equipment.  
797  
YH Group  
[
2516] The audit was not planned to address the concentration of loans to the YH group  
and the risks associated with such concentration.  
[
2517] There was no concern raised that although a YHDL audited financial statement  
was included in the 1987 AWPs, no financial statements were available to or reviewed  
by C&L thereafter.2  
798  
[
2518] Whiting testified that YHDHL and KVWIL were insolvent and had no assets with  
2799  
C&L should have understood that far greater risks were  
which to pay their debts.  
associated with equity loans made to YHDHL and KVWIL in that they were holding  
companies that did not carry on an active business and were secluded from the projects  
owned by YHDL.  
[
2519] C&L never ask for nor review information relating to Wersebe notwithstanding  
personal guarantees he had given to Castor. C&L never gathered audit evidence  
relating to those guarantees.  
[
2520] There was a failure to plan the audit in conjunction with the C&L Europe team.  
Ford did not select for audit review the $20 million of CFAG loans even though they  
represented the vast majority of the loan portfolio of CFAG and even though the audit  
plan in Montreal called for C&L to select approximately 85% of the loans by dollar value  
for detailed audit work.  
2796  
2797  
2798  
2799  
PW-460.  
PW-461.  
Quintal, December 1, 1995, p. 92  
Whiting, February 22, 2000, pp. 67, 70-79; May 9, 2000, p. 54  
500-05-001686-946  
PAGE: 521  
DT Smith Group  
[
2521] In the performance of their audits, and in valuing the loans in Castor’s portfolio,  
including the loans by CHIO to the D.T. Smith Group of Companies, C&L completely  
ignored the financial position of Castor’s borrowers, and did not ask for, nor review, the  
financial statements of such borrowers, in order to assess their ability to repay their  
loans to Castor.  
•
C&L never asked for, neither received nor reviewed, financial statements,  
audited or unaudited, of any of the D.T. Smith entities.  
•
C&L never asked for, neither received nor reviewed, any financial statements, or  
statements of net worth, with respect to David T. Smith personally, as guarantor  
of the CHIO loans.  
[
2522] C&L never considered the stage of completion of the construction projects, nor  
the fact that the sales of homes were far behind projections, or that there were  
significant cost overruns.  
[
2523] Even though the audit working papers of C&L contained an express reference to  
the effect that certain questions with respect to the loans by CHIO to the D.T. Smith  
entities had to be addressed, and that these questions could only be dealt with by  
2
800  
2801  
meeting with Ron Smith in Montreal , neither Mari-Beth Ford , nor any other  
representative of C&L, ever met with Ron Smith in Montreal, or elsewhere, or with  
anyone else associated with Castor, in Montreal, to discuss or review the CHIO loans to  
the D.T. Smith entities.  
[
2524] At the time she performed the audits of the DT Smith loans, Ford was not aware  
that the shares of the DT Smith entities were owned 50% by DT Smith and 50% by  
Norma Smith (wife of DT Smith); nor did she make any enquiry as to who the owners of  
the DT Smith entities were. She testified that it was of no importance, for purposes of  
her audit, to know who the beneficial owners of the DT Smith companies were. She was  
not aware that the only guarantee that existed for the loans to the DT Smith companies  
was from DT Smith.2  
802  
[
2525] At trial, she could not recall that each of the loan agreements for the CHIO loans  
to the DT Smith companies stipulated that the borrower and the guarantor were to  
2
803  
However, on discovery, Ford testified that she did not  
furnish financial statements.  
ask for financial information for any of the borrowers that she reviewed  
not necessary for purposes of her review if she otherwise had sufficient appropriate  
2
804  
since it was  
2800  
2801  
2802  
2803  
2804  
PW-1053-84-5  
Ford, November 14, 1995, pp. 184-185  
Ford, December 8, 2009, pp. 120-121.  
Ford, December 8, 2009, p. 121.  
Ford, November 7, 1995, pp. 105-106.  
500-05-001686-946  
PAGE: 522  
audit evidence in her professional judgment. She was wrong – she did not have  
sufficient appropriate audit evidence - she should have asked for that information and  
she should have looked at that information.  
[
2526] Ford admits that, in her AWPs, she failed to document either the levels of  
materiality, or the risk factors used in determining the nature, extent and timing of the  
audit procedures.2  
805  
Selman acknowledged that:  
«
MBF’s working papers “are not very fulsome or informative”, were “too brief”,  
“
“
below the standard of working paper preparation that would be the norm”, and  
without question, Ms Ford’s working papers are not very good working papers in  
total”. “They’re below the norm - - - they don’t meet the normal standard of  
working papers that I have seen in my experience.» 2  
806  
[
2527] At trial, Ford was referred to her AWPs for year-end 1988 in respect to the Wood  
Ranch II project and to Castor’s two loans relating thereto. She confirmed that this was  
2
807  
At discovery, she had  
one of the loans she had reviewed because it was a new loan.  
confirmed however that she had not made any determination as to the stage of  
development of the Wood Ranch II project, and that she did not know whether the  
townhouses were completed or not when she did her review.2808  
[
2528] With respect to Dove Canyon I and Dove Canyon II project, which loans had  
2809  
Ford admitted on discovery: «I do not mention a  
been selected by her for review,  
specific appraisal report, though I do note down the value – the different values of the  
2
810  
To say the least, Ford’s work was  
property at the different phases of the property».  
of poor quality – it is reasonable to wonder if she really understood what she was doing  
and what had to be done. Ford confused the revised loan amounts for the Dove I and  
Dove II projects with what she believed to be the value of the security for those  
2
811  
She did not have available to her any appraisals for these two projects: if  
projects.  
she had reviewed appraisals, she would have inscribed the appraisal values and not the  
2
812  
Ford committed the same mistake for the years 1989 and  
revised loan amounts.  
2813  
990.  
1
TWTC  
2529] Loan 1046 was secured by a pledge of the shares of TWTCI. Each year, the  
[
audit confirmation letters referred to such pledge. Notwithstanding that clear  
2805  
2806  
2807  
2808  
2809  
2810  
2811  
2812  
2813  
Ford, December 8, 2009, p. 127. See also PW-1419-2A, Section 5145.05.  
Selman, June 11, 2009, pp. 14-16.  
PW-1053-84, seq. p. 88; Ford, December 8, 2009, p. 178.  
Ford, November 7, 1995, pp. 98-99.  
Ford, December 8, 2009, p. 34.  
Ford, November 7, 1995, p. 101.  
Ford, December 9, 2009, pp. 36-47  
Ford, December 9, 2009, p. 39-40.  
PW-1053-83, seq. p. 114 (1989), PW-1053-81, seq. p. 78 (1990).  
500-05-001686-946  
PAGE: 523  
information, C&L described the loan as a second mortgage in each of 1987, 1988, 1989  
2
814  
The 1987 AWPs were merely brought forward mechanically to 1988 and  
and 1990.  
then copied for 1989 and 1990 even though the information was wrong. No attempt  
was made to reconcile the description of the security on the commitment letters and  
confirmation letters with the “understanding” that the loan was a second mortgage.  
[
2530] Although loan 1046 had originated in 1984, no questions were put as to why this  
one-year” loan had been renewed on six subsequent occasions. No questions were  
“
posed by C&L (same for 1989 and 1990) as to why the interest was being capitalized to  
the loan, notwithstanding the obligation of the borrower to pay such interest and why  
reasonable assurance existed as to the collectability of this interest. Although the  
borrower in each of the years was Toronto Waterfront Developments Corp., in each of  
1
987, 1988, 1989 and 1990, C&L erroneously described the borrower as Toronto  
Waterfront Ltd.  
[
2531] Loan 1067 was a loan to YHDL secured by a pledge of the common shares of  
TWTCI owned by YHDL. Each of the audit confirmation letters sent to C&L for purposes  
of the audits described the security as a first pledge of issued and outstanding common  
2
815  
shares.  
In each of the years 1987 through 1990, C&L described the loan as  
“
debenture loans”. This error was blindly brought forward each year.  
[
2532] Although all of the interest on loan 1067 was capitalized to account 046/Loan  
1
153 contrary to the loan agreements, C&L did not question why this unplanned  
capitalization of interest had occurred each year. No attempt was made to obtain SAAE  
to value the loan.  
[
2533] Although C&L referred each year to the pledge of an interest in the office and  
2816  
no effort was made to ascertain whether such security had ever  
condominium tower,  
been registered in respect of loan 1049. The commitment letters that C&L allegedly  
looked at called for legal opinions to be obtained confirming that the security was legal,  
valid, binding and enforceable. No such legal opinion existed; on the contrary, the  
opinions disclosed the opposite.  
[
2534] All of the interest on loan 1049 was capitalized to the loan even though the  
commitment letters did not provide for such capitalization of interest. It was an error on  
the part of C&L not to ascertain why this borrower was not paying interest as appeared  
on the mortgage and loan ledger card PW-167EE.  
2814  
2815  
2816  
For example, 1989: PW-1053-19, seq. pp. 189, 287.  
For example, 1989: PW-1053-19, seq. pp. 191, 260.  
For example, 1989: PW-1053-19, seq. p. 193.  
500-05-001686-946  
PAGE: 524  
[
2535] C&L referred in the LEQ for loan 1049 to a Stewart Young & Mason appraisal  
2817  
Such appraisal does not exist. In fact, the  
between $182 million and $285 million.  
range of values on the appraisal suggests that it could not have been an appraisal.  
[
2536] No attempt was made by C&L to obtain audited or unaudited financial statements  
of any of the three borrowers notwithstanding the undertakings of the borrowers to  
provide such statements in the loan agreements, and the requirement for such  
information in the LEQ.  
[
2537] No attempt was made to ascertain whether the borrowers were complying with  
their loan covenants, as Higgins had suggested in the peer review.  
[
2538] Notwithstanding a chart provided to C&L for each audit that Stolzenberg had a  
2
.35% interest in TWTCI, no effort was made to disclose that this was a related party  
2818  
transaction.  
1989  
MLV  
[
2539] For 1989, virtually all of the errors committed by the audit staff in the 1988 audit  
2819  
were repeated such that it is unnecessary to repeat the summary referred to above.  
[
2540] In particular, breaches of GAAS included the failure to aggregate all loans  
secured by the assets of the MLV project, the failure to accurately analyze the security  
available to Castor for each loan and the use of inapplicable appraisal values without  
any review of the assumptions contained in the appraisal reports.  
[
2541] Once again, no audited financial statements of MLVII were obtained and the  
unaudited draft disclosed increasingly alarming negative information.  
[
2542] Wightman once again failed to follow up on information and representations of  
management made to him in prior years and to properly question management, and to  
follow up on information provided by management, during the year-end wrap-up  
meeting. In addition, the notes made by him at the year-end wrap-up meeting are  
sparse and superficial.  
2817  
2818  
2819  
PW-1053-23, seq. p. 201.  
PW-1053-23, seq. p. 198.  
See also PW-2941, Vol. 3, pp. 120-155.  
5
00-05-001686-946  
YH Group  
2543] There was no concern raised that although a YHDL audited financial statement  
PAGE: 525  
[
was included in the 1987 AWPs, no financial statements were reviewed by C&L for  
1
988 and 1989.2  
820  
[
2544] Whiting testified that YHDHL and KVWIL were insolvent and had no assets with  
2821  
C&L should have understood that far greater risks were  
which to pay their debts.  
associated with equity loans made to YHDHL and KVWIL in that they were holding  
companies that did not carry on an active business and were secluded from the projects  
owned by YHDL.  
[
2545] The lack of substantive audit work was prevalent. For example, Belliveau, the  
junior staff member responsible for the 1989 investment section, acknowledged that the  
only audit work performed on Loan 1081 amounted to relying on the client and to notint  
2
822  
that there was a promissory note.  
[2546] Nothing was done in relation to Wersebe’s guarantees.  
TSH  
2547] In 1989, the AWPs for the Management Contract loan 1137 indicate that the  
[
auditor was shown financial statements of the TSH that disclosed $19.4 million of gross  
2
823  
revenue, consistent with the month end report for the TSH for December 1989 . Even  
though this was shown to them, C&L ignored the negative information, i.e. the decline in  
revenue over the year, the actual income pre-debt of $298,970 as compared to the  
budgeted amount of $3.5 million and the net income pre-debt of negative $14.5 million).  
The cash flow problems of the TSH were not concealed, as Selman would have one  
believe.2  
824  
[
2548] Aside from recording the gross figure for the management fees in connection  
with loan 1137, C&L did not consider these financial statements in the analysis of the  
TSH loans whereas such financial statements should have been reviewed. C&L’s failure  
to consider negative information in financial statements provided by the client reflects  
the inadequacy of the audit work and the failure to exercise independent professional  
judgment.  
2820  
2821  
2822  
2823  
2824  
Quintal, December 1, 1995, p. 92  
Whiting, February 22, 2000, pp. 67, 70-79; May 9, 2000, p. 54  
Belliveau, May 23, 1996, pp. 431-441.  
PW-429.  
Selman suggests that Management concealed the cash flow problems of the TSH from C&L (D-1295,  
pp. 37-38).  
500-05-001686-946  
PAGE: 526  
[
2549] Belliveau, who saw these financial statements for the management fee analysis,  
2825  
The failure to obtain and review  
also did the detailed work on the Topven loans.  
financial statements of borrowers for material loans was an audit error, especially in the  
case of the loans that had no real estate collateral such as the grid note loan.  
CSH  
[
2550] For the 1989 audit, the three loans presenting the highest level of risk were not  
nd  
selected for detailed review in Montreal and the 2 mortgage loan was not selected for  
2
826  
review by the audit team overseas as it was no longer a “new” loan.  
This was both a  
2
827  
planning and a performing failure.  
2551] The loan documents reviewed by C&L called for the monthly payment of interest  
[
in cash (apart from the reserve accounts that were depleted in 1988 and thereafter  
2
828  
The mortgage and loan ledger cards  
increased the exposure on the project).  
reviewed by C&L, as well as the accounting records, indicated that the CSH loans were  
nd  
all being capitalized on the grid note loan in the Montreal portfolio, including the 2  
2
829  
In 1989, an analysis of capitalized interest was performed  
mortgage loan from CHIF.  
by the audit team in Montreal and they were informed by Management of the  
capitalization of interest.  
[
2552] The loan documents reviewed by C&L called for the annual provision of financial  
statements prepared in accordance with GAAP, by a Chartered Accountant for Skyview.  
2
830  
For the 1989 audit, C&L did review the 1989 financial statements of Skyview , but for  
the sole purpose of the management contract loan. They noted only the amount paid in  
management fees and the gross revenue but failed to note and consider that there was  
a loss for the year of over $7 million, and a cumulative deficit of $11.7 million.  
OSH  
[
2553] Failures of 1988 relating to loans 1049 and 1152 were repeated.  
[
2554] Ron Smith provided accurate information to the audit staff member who then  
2
831  
which indicated that  
proceeded to make egregious errors. Smith prepared a diagram  
the appraised value was $29 million, but that $16 million was ascribed to Campeau  
leaving a net balance of $13 million «after renovations to be completed».  
2
825  
826  
Belliveau, May 23, 1996, pp.496 and following  
2
PW-1419-2A, Section 5130.24, introduced into the Handbook in October 1988, required a risk-based  
audit at the time of the 1988 audit, the auditors were aware that the risk of misstatement was in the  
loan portfolio and as part of audit planning should have focused on loans with weaker or no security.  
PW-2908, Vol. 1, pp. 5-12, 5-32.  
2
827  
828  
2
st  
PW-1087-1 (Skyview, 1 mortgage); PW-1087-7 and PW-1087-8 (321351, pledge of shares): PW-  
1
087-10 (Skyeboat, pledge of shares), and PW-1087-6 (Skyview grid note).  
2829  
2830  
2831  
PW-167R, PW-167Q, PW-167T.  
PW-467C  
PW-1053-19, seq. p. 244.  
500-05-001686-946  
PAGE: 527  
2
832  
indicated that this $13 million net balance was  
[
2555] The Fitzsimmons appraisal  
predicated upon renovations being performed at a cost in excess of $10 million. C&L  
2
833  
the C&L  
failed to question Castor as to the cost of the renovations. On the LEQ,  
junior staff member used the $13 million value as if it was the net value, failed to  
consider what the assumptions of the appraisal were, did not obtain any financial  
statements of the borrower and erroneously considered that the loan was covered.  
TWTC  
[
2556] For 1989, C&L referred to a “Royal LePage Appraisal” for the condominium of  
$
70 million and to “offers” for the land site dated December 5, 1989 of $145 million. The  
2834  
70 million was merely the internal value arrived at by YH and the “offers” were,  
$
2
835  
rather, a brokerage mandate given to Coldwell Banker on December 5, 1989.  
[
2557] C&L then added $70 and $145 and inexplicably arrived at the figure of $235  
million (instead of $215 million).  
[
2558] In their analysis, C&L used a security value of $235 million. No one detected this  
clerical, but significant error. Had a review been done, as it should have to comply with  
GAAS, the error would have been obvious.  
DT Smith  
[
2559] In respect of the Circle Ranch project, Ford confirmed that this was one of the  
loans chosen by her for review for year-end 1989. Even though it had been chosen for  
review, Ford was unable to direct the Court to AWPs evidencing audit work performed  
to value the Circle R loan or to any evidence supporting her notation: «Appraisal to be  
2
836  
made – approximately $15 million in value».  
[
2560] On discovery, Ford was asked about the notation «appraisal to be made» and  
she testified as follows:  
•
at the time of her audit of this loan, she «must have seen documents that made  
her happy»;  
•
•
there was no appraisal at the time of her review;  
she made no further inquiry;  
2832  
2833  
2834  
2835  
2836  
PW-462, bates p. 53.  
PW-1053-19, seq. p. 247.  
PW-1069-8.  
PW-1069-13.  
Ford, December 9, 2009, pp. 99-103.  
500-05-001686-946  
PAGE: 528  
•
she couldn’t recall asking for any information regarding that property, nor could  
2
837  
she recall having any further information with respect thereto.  
[
2561] The Rancho Parcel II and Rancho Parcel V projects were also chosen for review  
for year-end 1989 but Ford neither received nor reviewed a summary or a full appraisal  
report for these projects.2  
838  
[
2562] In respect of the Rancho California project, Ford confirmed that this was one of  
2839 2840  
On her AWP, she  
the loans selected by her for valuation for year-end 1989.  
recorded a value of $33.2 million under the column “Appraisal Received” representing  
the appraisal value of the project as if it were improved with rough-grading ready for  
final site preparation for finished lots, ready for construction of houses, while the “as is”  
value is stated by the appraiser to be $13 million only.2841  
[
2563] Ford chose the higher value without any evidence in her AWPs to support her  
choice or the fact that the land had been rough-graded, ready for final site inspection for  
2
842  
finished lots, ready for construction of houses.  
[
2564] Ron Smith confirmed that virtually nothing was ever done on this project.2843  
So, with all of those delays, what happened was that he ended up having to  
extend the commitment in nineteen ninety (1990) and at that point in time, we put  
it into a holding pattern such that all we did was provide for holding the land as is,  
the grading had not really gone... there hadn't been much grading, all they  
were doing at that point in time was protecting the property from brush fires and  
keeping it at sort of a very slight mass-graded level. So, virtually nothing had  
been done to the project and it was put into a holding pattern from August  
nineteen ninety (1990) onwards, so nothing really progressed on this  
project at that point in time.2 (our emphasis)  
844  
[
2565] Even though the audit working papers of C&L contained an express reference to  
the effect that certain questions with respect to the loans by CHIO to the D.T. Smith  
entities must be addressed, and that these questions could only be dealt with by  
2
845  
2846  
meeting with Ron Smith in Montreal , neither Mari-Beth Ford , nor any other  
representative of C&L, ever met with Ron Smith in Montreal, or elsewhere, or with  
anyone else associated with Castor, in Montreal, to discuss or review the CHIO loans to  
the D.T. Smith entities.  
2837  
2838  
2839  
2840  
2841  
2842  
2843  
2844  
2845  
2846  
Ford, November 7, 1995, pp. 249-251.  
Ford, November 7, 1995, pp. 47-55, 238-240  
Ford, December 9, 2009, p. 143.  
PW-1053-83, seq. p. 103.  
PW-1053-83, seq. pp. 133-134.  
Ford, December 9, 2009, p. 148.  
Ron Smith, June 11, 2008, pp. 90 and following; PW-1120  
Ron Smith, June 11, 2008, p.93  
PW-1053-83-5  
Ford, November 14, 1995, at pp. 184-185  
500-05-001686-946  
PAGE: 529  
[
2566] Had C&L met with Ron Smith, as their own audit working papers said they  
should have, and had a proper review of the work performed by the audit staff been  
done as GAAS required, C&L would have known that Ford’s conclusions were wrong.  
C&L would have realized they could not and should not rely on Ford’s work product.  
[
2567] Inexplicably, C&L did not consider the stage of completion of the projects, nor the  
fact that the construction or the sales of homes were far behind projections, or that there  
were significant cost overruns.  
[
2568] Moreover, C&L never asked for, neither received nor reviewed, any financial  
statements, audited or unaudited, of any of the D.T. Smith entities.  
[
2569] C&L never asked for, neither received nor reviewed, any financial statements, or  
statements of net worth, with respect to David T. Smith personally, as guarantor of the  
CHIO loans.  
1990  
MLV  
[
2570] By 1990, the MLV project had deteriorated to the point that it was identified in the  
2847  
audit planning memorandum for specific attention by the audit staff.  
[2571] Castor itself had taken a loan loss provision of $5 million on the project.  
[
2572] Rather than having borrowers pay interest from amounts advanced by Castor,  
2848  
without any  
interest was simply capitalized but nevertheless recognized as revenue  
assurance of collectability.  
[
2573] Faced with this apparent disastrous situation, C&L nevertheless relied upon  
appraisals to support a value of $144 million, an increase of $14 million over the  
appraisal amounts used in 1988 and 1989.  
[
2574] Once C&L determined that Castor viewed these MLV loans as “high risk”, that  
there was a shareholders’ deficiency of $65 million and that Castor proposed a loan loss  
provision of $5 million, there was absolutely no basis for C&L to conclude that the  
revenue (all of which was capitalized) had reasonable assurance of collectability.  
[
2575] The summary notes made by Wightman during the year-end wrap up meeting  
reflect a specific discussion about the MLV project. Remarkably, although this project  
was included in the $275 million of problem loans, Wightman did not see fit to do any  
2
847  
848  
PW-1053-16, seq. pp. 260, 267.  
PW-1075A, PW-1070H-1  
2
500-05-001686-946  
PAGE: 530  
further analysis of the carrying value of the MLV loans, nor did he request the audit staff  
2
849  
to perform any additional procedures.  
[
2576] The attitude of Wightman is all the more surprising since, for the 1990 audit, he  
2850  
which reflected a  
was given an aggregation of the loans of CHL and CHIF  
shareholders’ deficit in excess of $65 million. This aggregation was also deficient in that  
it did not include loans 1048 to YHLP and 1125 to KVWIL, such that the reality of the  
situation was even worse than disclosed in the aggregation.  
[
2577] As noted in the reports of Vance2851 and Froese2852, numerous errors were made  
in the AWPs.  
[
2578] The problems of the previous years were exacerbated by the insistence of  
FICAN, a secured creditor, to be paid in full: Castor was forced to advance additional  
funds to pay out the FICAN loan in the amount of $6 million, above and beyond  
advances made to pay real estate taxes as well as support payments to cover interest  
due to prior ranking lenders.2  
853  
[
2579] The unaudited financial statements of MLVII continued to disclose deteriorating  
operations which required substantial support from YH related entities.  
[
[
2580] Wightman himself never saw the appraisals relating to the MLV project.2854  
2581] In attending the year-end wrap up meeting, Wightman was not aware that Ron  
Smith had informed the audit staff that the loans to the MLV project were considered by  
him to be “high risk”.2  
855  
[
2582] Furthermore, the notations made by Wightman contain errors and  
inconsistencies which betray a lack of understanding of the facts and the exposure of  
2
856  
Wightman expected that “serious provisions” would be  
Castor to the MLV project.  
2
857  
Except for a lack of independence affecting  
taken on the MLV project after 1990.  
negatively his judgment and objectivity, one cannot understand Wightman’s failure to  
have required such provisions for purposes of the 1990 audit.  
2849  
2850  
2851  
2852  
2853  
2854  
2855  
2856  
2857  
Wightman, February 25, 2010, pp, 46-52.  
PW-1053-15, seq. pp. 159, 259.  
PW-2908, Vol. 2, pp. A-15 to A-23 (MLV).  
PW-2941, Vol. 3, pp. 9-17.  
PW-1070F-2; PW-1070F-4; PW-1070F-5; R. Smith, May 14, 2008, p. 139.  
Wightman, February 25, 2010, p. 42.  
Wightman, February 25, 2010, p. 52.  
PW-1053-12, seq. pp. 76-93.  
Wightman, February 25, 2010, p. 92.  
5
00-05-001686-946  
YH Group  
2583] There was no concern raised that although a YHDL audited financial statement  
PAGE: 531  
[
was included in the 1987 AWPs, no financial statements were reviewed by C&L for  
1
988, 1989 and 1990.2  
858  
[
2584] Whiting testified that YHDHL and KVWIL were insolvent and had no assets with  
2859  
C&L should have understood that far greater risks were  
which to pay their debts.  
associated with equity loans made to YHDHL and KVWIL in that they were holding  
companies that did not carry on an active business and were secluded from the projects  
owned by YHDL.  
[
2585] Again, errors were made and not caught. Proper review required by GAAS did  
not take place. By way of example, for the 1990 audit of Loan 1081 to YHDHL, the  
junior audit staff member purported to place an “X” beside the name of the borrower on  
2
860  
2861  
and indicated YHDL when in fact the borrower was YHDHL. He  
the LIQ  
erroneously indicated that «CHL gets securities from % of ownership on different  
projects that YHDL is involved therefore no direct securities from YHDL but rather from  
the different projects (main collateral)». In fact, the borrower owned no projects but was  
merely the holding company that owned the shares of YHDL, which in turn was  
insolvent.  
The nasty nine loans ($40 million)  
[
2586] C&L failed in every conceivable way to audit the $40 million of loans, the “Nasty  
Nine Loans”, which, if they had been written off, would have wiped out alone all of  
Castor’s profit for the year.  
[
2587] In the case of the Nasty Nine loans, Quesnel reviewed them because he found  
2862  
Although he considered these loans doubtful accounts and  
the situation “bizarre”.  
brought forward the schedules to Wightman, no further audit work was done to  
determine the collectability of such unsecured loans or the borrowers’ financial position.  
[2588] The Nasty Nine loans were made just prior to year-end.  
[
2589] The loans were part of the reallocation of approximately $60 million of accrued  
year end indebtedness.  
2858  
2859  
2860  
2861  
2862  
Quintal, December 1, 1995, p. 92  
Whiting, February 22, 2000, pp. 67, 70-79; May 9, 2000, p. 54  
PW-1053-15, seq. p. 299.  
PW-1053-15, seq. p. 327.  
Quesnel, November 24, 1995, pp. 110-114  
500-05-001686-946 PAGE: 532  
[
2590] By the time of the audit, the loans had not yet been finalized and Smith advised  
the auditors that they were very temporary loan situations and that Castor «hadn’t  
2
863  
received the documentation yet».  
[
2591] The commitment letters for the loans do not disclose the existence of any  
2864  
Smith was not aware of any guarantees being obtained and never  
guarantees.  
advised the auditors that the loans were secured by guarantees.  
[
2592] As a matter of fact, Castor had not obtained any personal guarantees from  
Wersebe in respect of these nine loans prior to the completion of the audit on February  
5, 1991.  
1
[
2593] There were no requests by C&L for audit confirmations in respect of the nine  
loans and the AWPs disclosed that C&L considered the loans to be unsecured.  
[
2594] C&L obtained absolutely no sufficient appropriate audit evidence to value these  
loans described as “bizarre” by the junior staff member. There were no credit analyses,  
no financial information or anything whatsoever to substantiate that the borrowers had  
the capacity to repay these loans.  
2
865  
[
2595] The red loan files for the nine loans,  
which the auditors purport to have looked  
at based on their tick legend, provided no information about the borrowers’ capacity to  
pay or the existence of guarantees.  
[
2596] The most basic of window dressing procedures would have revealed the circle of  
funds related to these year end loans. Tooke and Rancourt testified that although they  
had no knowledge of the Nasty Nine transactions, it was obvious to them as  
bookkeepers that the $40 million of cash that left Castor was the same $40 million that  
2
866  
Tooke said she gave to the auditors all the  
came back on or about the same dates.  
2
867  
Moreover, in cross-  
books and records and supporting documents they did ask for.  
examination, she confirmed she had never been told by Stolzenberg, Dragonas,  
Goulakos or Ron Smith to avoid topics or to refrain from discussing anything with C&L’s  
audit staff members.2  
868  
[
2597] C&L correctly “expressed uncertainty” about the loans and placed them on their  
list of doubtful accounts.  
2
2
2
2
863  
864  
865  
866  
R. Smith, May 15, 2008, p. 113.  
PW-1064-1 to PW-1064-9.  
For example, PW-1064-1.  
Tooke, February 27, 2008, pp. 146, 149, 163-168; Rancourt, February 29, 2008, pp. 11-16, 20, 44,  
5
0, 136 and following; Rancourt, March 3, 2008, pp.4-8; PW-99A and PW-173  
2867  
868  
Tooke, February, 28, 2008, p. 95  
2
Tooke, February 28, 2008, pp. 27, 65, 89-90, 92-99  
500-05-001686-946  
PAGE: 533  
[
2598] At the year-end meeting, and after having asked Ron Smith to leave them,  
2869  
but he  
Wightman raised with Stolzenberg the fact that the loans were problematic  
did nothing to resolve such problem before signing off on the audit. Except for a lack of  
independence affecting negatively his judgment and objectivity, there is no explanation  
for Wightman’s failure to have required that further audit work be done in relation to  
those loans.  
[
2599] Essentially, C&L failed to audit these $40 million of loans which, if they had been  
written off, would have alone wiped out all of Castor’s profit for 1990.  
TSH  
[
2600] In 1990, the unsecured grid note loan was confirmed but a loan evaluation  
questionnaire was completed only for the first mortgage loan. The unsecured grid note  
loan 1148 was identified by the junior auditor as a doubtful account and was clearly of a  
higher risk than the first mortgage loan but no audit evidence was obtained to assess  
2
870  
Such errors in the performance of  
the collectability of this loan of $26.4 million.  
auditing should have been identified by the reviewer had a proper review, in accordance  
to GAAS, been done.2  
871  
[
2601] In 1989, information had been brought forward to Wightman about the TSH, to  
the effect that there was about $10 million of capitalized interest in connection with  
Topven; and Wightman had noted in the AWPs that «Money should be repaid in  
2
872  
Wightman admitted that the money was not repaid in 1990, but he did not  
1
990.»  
2
873  
No further work was done to  
consider this to be a management misrepresentation.  
assess the collectability of these loans, although the audit plan for 1990 indicated the  
2
874  
TSH as a project that «will need to be looked at in detail».  
[
2602] For the 1990 audit, both the audit staff in Montreal and Wightman should have  
2875  
Wightman only considered the loans  
been aware of the global exposure on the TSH.  
in Montreal, when he attempted to aggregate the TSH loans for the wrap up meeting,  
and he incorrectly identified the aggregate of the TSH loans as $66 million.2876  
2
869  
870  
R. Smith, September 16, 2008, p. 215.  
2
PW-1419-2A, Section 5130.24, introduced into the Handbook in October 1988, required a risk-based  
audit at the time of the 1988 audit, the auditors were aware that the risk of misstatement was in the  
loan portfolio and as part of audit planning should have focused on loans with weaker or no security.  
PW-1053-24, seq. pp. 347–361 (Audit Plan); PW-1053-23, seq. p. 263 (Confirmation Letter), Picard,  
December 6, 1995, pp. 109–117; Mitchell, April 24, 1996, pp. 197–203 to the effect that they  
understood that all loans for which a confirmation was sent were to be included in the sample for the  
completion of loan questionnaires.  
2
871  
2872  
2873  
2874  
2875  
2876  
PW-1053-19, seq. p. 104.  
Wightman, October 18, 1995, pp. 202–203.  
PW-1053-16, seq. p. 267.  
Vance, April 8, 2008, p. 204-205; PW-2809, Vol. 2, p. E-3; PW-2893-43.  
Note: Goodman erroneously relies on this AWP and calculation by ECW as a value indicator for the  
CSH in 1990 (D-1312, p. 420).  
500-05-001686-946  
PAGE: 534  
nd  
Wightman negligently omitted the CHIF Topven 2 mortgage loan and the Lambert  
2
877  
loans from his analysis.  
this project, but they did not.  
C&L should have identified easily the security deficiency on  
[
2603] Wightman recorded the information that the Skyline Hotels were in a difficult  
position because of declining interest rates and the decision to cease capitalizing  
2
878  
In fact, Management did not cease the capitalization of  
interest on these loans.  
interest during 1991, a fact evident in the general journal and the mortgage and loan  
ledger cards, but C&L did nothing to confirm that Management was fulfilling its  
commitments prior to their issuance of the share valuation letters in March and October  
1
991.  
CSH  
2604] In 1990, C&L recorded in the AWPs that the shares of Skyview were 70% owned  
[
by Skyeboat and 30% owned by 321351. C&L also recorded the shares of Skyeboat  
2
879  
Neither the  
were worth $20 million and that shares of 321351 were worth $25 million.  
junior auditor nor the reviewer questioned the evident mistake in these values or did any  
work to corroborate the value attributed to the collateral.  
[
2605] For the 1990 audit, C&L expressed uncertainty about the Skyview grid note, loan  
1
154 but, inexplicably, considered the lower ranking loans to Skyeboat and 321351 to  
2880  
be “good”. This made no sense, according to Ron Smith.  
[
2606] For the 1990 audit, both the audit staff in Montreal and Wightman should have  
been aware of the global exposure on the CSH because the AWPs explicitly referred to  
the topic as well as the overseas inter-office MAPs. Nevertheless, Wightman only  
considered the loans in Montreal when he attempted to aggregate the CSH loans for the  
wrap up meeting and incorrectly identified the aggregate of the CSH loans as $53  
2
881  
million when, in fact, the four loans added up to $64 million.  
[
2607] Even without the additional exposure from the $16 million loan in the overseas  
portfolio, C&L should have easily identified the security deficiency on this project, but  
they did not.  
2877  
2878  
2879  
2880  
2881  
PW-1053-12, seq. p. 77.  
PW-1053-12, seq. p. 84. See also PW-6-1, Tab 23 and Tab 24 and PW-167D.  
PW-1053-15, seq. pp. 287-288, 289-299.  
Ron Smith, September 5, 2008, p. 166.  
PW-1053-12, seq. p. 90.  
500-05-001686-946  
PAGE: 535  
OSH  
[
2608] In 1990, when loan 1049 was transferred to 687292, C&L indicated that the  
interest was being capitalized, but made no attempt to understand why the borrower  
was in default of its loan obligations.  
[
2609] C&L totally ignored the existence of the rental obligations to Campeau which  
constituted a prior ranking obligation that had to be met prior to the payment of any such  
interest.  
[
2610] C&L erroneously described loan 1152 as a second mortgage on the leasehold  
when the confirmation letter clearly indicated that the security was merely a “grid  
2
882  
note”.  
Although the loan called for the payment of interest by the borrower, C&L  
indicated that the interest was being capitalized and made no attempt to understand  
why this operating hotel was not generating sufficient monies to meet its interest  
obligations.  
[
2611] Furthermore, C&L was aware from the loan documents that Castor had the right  
to obtain revenue and expense statements, rent rolls and statements of capital  
expenditures from the borrower such that C&L should have requested access to such  
information.  
[
2612] In the LEQ,2 the C&L junior staff member inexplicably ignored that $16 million  
883  
of the $29 million appraisal value was ascribed to the freehold interest of Campeau.  
[
2613] In addition, C&L erroneously considered that loan 1165 was in the amount of  
$
11,114,595 when, in fact, the audit confirmation letter that they received and  
2884  
indicated that the amount was $12,678,479. Consequently,  
supposedly looked at  
the analysis on the LEQ was wrong by approximately $17,500,000 (the aggregate of the  
$
16 million Campeau interest and the $1.5 million understatement of Loan 1165).  
[
2614] Even using their flawed figures, C&L should have arrived at a deficiency of more  
than $12 million rather than a surplus of $5,381,655.  
[
2615] C&L did not request nor review any financial information regarding the borrower  
or the hotel and made no attempt to understand why Castor was not receiving any cash  
payments from its borrower for interest and fees.  
[
2616] C&L did not ask any questions as to why (as recorded on the yellow cards)  
Castor was not only capitalizing interest and fees but, also, was funding expenses of the  
borrower and paying for its legal fees.  
2882  
2883  
2884  
PW-1053-15, seq. pp. 281-282, 306.  
PW-1053-15, seq. p. 283.  
PW-1053-15, seq. p. 320.  
500-05-001686-946  
PAGE: 536  
[
2617] Finally, C&L made no attempt to ascertain whether 687292 was a related party.  
The information that established that it was a related party was readily available and not  
hidden from anyone. In fact, the public corporate records clearly indicated that  
Stolzenberg was a director and officer of this company.  
MEC  
[
2618] The 1986 AWPs2 indicate that C&L was aware of the 80% maximum loan to  
885  
value ratio (“LTV”) and took such ratio into account for purposes of the valuation of the  
Les Terrasses loans in 1986. C&L further recognized that the high LTV would put  
Castor at risk. However, in 1990, C&L disregarded the policies of Castor relating to the  
maximum loan to value ratio against which Castor was prepared to lend.  
[
2619] By the 1990 audit, C&L had already determined that the outstanding  
indebtedness on the MEC property exceeded the appraised value even if such analysis  
was erroneous in that it excluded certain loans on the MEC project, the costs to  
complete, the trade debt and the accrued interest.  
[
2620] In the AWPs of 1989, Wightman had indicated that the equity loan to YHDL (loan  
1
042) would be repaid in 1990. Wightman testified that he assumed that interest on the  
2886  
YHDL equity loan was not capitalized even though the AWPs indicated the opposite.  
The General Journal which was given to the auditors indicated that interest on this loan  
2
887  
was capitalized each month in 1990 to Account 046/Loan 1153.  
2
888  
th  
[
2621] In his 1990 year-end notes,  
Wightman erroneously referred to non-existent 4  
mortgages in favour of Castor in respect of the equity loans to 97872 and YHDL. It was  
noted by C&L that a “new” appraisal was coming and that the existing appraisal of $275  
million was done in “1989” «before Center was complete». No attempt was made to  
resolve:  
•
•
•
why the property had not been sold and the loan not repaid in 1990, as  
previously represented;  
why no loan loss provisions were required even though the loans exceeded  
100% of the appraised value;  
why Castor was tolerating capitalization of all interest.  
[
2622] Neither C&L staff members nor Wightman made any effort to ascertain why the  
MEC would have a higher value than the available Royal LePage appraisal when none  
of the assumptions on which such appraisal was based were anywhere close to being  
2885  
2886  
2887  
2888  
PW-1053-35, seq. p. 134.  
Wightman, October 10, 1995, pp. 26-29.  
PW-86, bates p. 000486.  
PW-1053-12, seq. p. 93.  
500-05-001686-946  
PAGE: 537  
attained. C&L made no attempt to seek audit evidence to corroborate management’s  
representations regarding the “internal” value of $300-350 million.  
[
2623] Given the situation in 1990, it was incumbent upon the auditors to insist upon  
updated appraisals. If C&L had complied with GAAS, and sought sufficient appropriate  
audit evidence, they would have found that the value of the MEC project was  
significantly lower than what management was telling them: through an updated report,  
2
889  
.
Royal LePage had appraised it at $241 million, as of September 1, 1990  
[
2624] Moreover, C&L made no attempt to ascertain who the owners of 97872 were.  
Had they merely reviewed the closing binders for the refinancing or asked the most  
basic of questions, they could have readily ascertained that Stolzenberg controlled or  
2
890  
significantly influenced 97872.  
TWTC  
[2625] C&L continued to make all of the same mistakes in 1990.  
[
2626] It is remarkable that while the audit staff member for 1990 redid the LEQ, he  
continued to add $70 million and $145 million to arrive at $235 million instead of $215  
2
891  
He continued to refer to the “offers” which, by this time, would have been 14  
million.  
months old and erroneously referred to the Royal LePage appraisal.  
[
2627] Notwithstanding the reference in the AWPs for 1989 that the sales would be  
completed by April 1990, no questions were put by C&L as to why the office lands were  
not yet sold.  
[
2628] C&L considered the best TWTC loan (Loan 1149 to TWTCI) to be “risky” and of a  
“
“
high risk nature”, but considered the lower ranking loans to the parents of TWTCI to be  
2892  
good”. Such comments evidence a total lack of understanding on the part of the  
auditors and an absence of proper review.  
[
2629] Notwithstanding that the junior C&L staff member correctly identified that loan  
149 was of a high risk nature and that he wrote «C&L judge that CHL could take a  
1
reserve on this loan», no consideration was given by C&L to the fact that the lower  
ranking loans would necessarily also require a reserve.  
[
2630] In fact, nothing was done to resolve the suggested reserve on loan 1149 that had  
been brought forward by Quesnel.  
2889  
2890  
2891  
2892  
PW-1108B  
PW-1102A-6.  
PW-1053-15, seq. p. 223.  
PW-1053-15, seq. pp. 219, 221, 225.  
500-05-001686-946  
PAGE: 538  
[
2631] Smith testified that C&L never made any recommendations to him regarding any  
of the loans. He added that it did not make sense that the TWTCI loan could be bad or  
2
893  
Finally, Smith  
doubtful, but that the TWDC loan and YHDL loan could be good.  
testified that no audit staff member ever questioned him regarding the assumptions in  
2
894  
the only  
the Stewart, Young & Mason appraisal that had been obtained by Castor,  
one that Castor had for the audit.  
[
2632] Once C&L judged that the best TWTC loan required a reserve, all the TWTC  
loans should have been placed on a non-accrual basis and C&L should have insisted  
that all revenue be reversed, but they did not.  
DT Smith Group  
[
2633] In the performance of the audit, and in valuing the loans by CHIO to the D.T.  
Smith Group of Companies, C&L completely ignored the financial position of Castor’s  
borrowers, and did not ask for, nor review, the financial statements of such borrowers,  
in order to assess their ability to repay their loans to Castor.  
•
C&L never asked for, neither received nor reviewed, any of the financial  
statements, audited or unaudited, of any of the D.T. Smith entities.  
•
C&L never asked for, neither received nor reviewed, any financial statements, or  
statements of net worth, with respect to David T. Smith personally, as guarantor  
of the CHIO loans.  
[
2634] Thus, for the year ended December 31, 1990, although the D.T. Smith Group of  
Companies was indebted to Castor for US$237 million, C&L failed to request, obtain, or  
review any financial statements for the D.T. Smith Group of Companies, and for the  
guarantor, and was unaware that the D.T. Smith borrowers were in default of the  
covenant to furnish the financial statements of the borrower(s) and the guarantor to  
Castor.  
[
2635] C&L did not consider the stage of completion of the construction projects, nor the  
fact that the sales of homes were far behind projections, or that there were significant  
cost overruns.  
[
2636] Even though the audit working papers of C&L contained an express reference to  
the effect that certain questions with respect to the loans by CHIO to the D.T. Smith  
entities had to be addressed, and that these questions could only be dealt with by  
2
895  
2896  
meeting with Ron Smith in Montreal , neither Mari-Beth Ford , nor any other  
representative of C&L, ever met with Ron Smith in Montreal, or elsewhere, or with  
2893  
2894  
2895  
2896  
R. Smith, September 16, 2008, pp. 173-177.  
R. Smith, September 16, 2008, pp. 163-166.  
PW-1053-81-2  
Ford, November 14, 1995, at pp. 184-185  
500-05-001686-946  
PAGE: 539  
anyone else associated with Castor, in Montreal, to discuss or review, the CHIO loans  
to the D.T. Smith entities.  
[
2637] C&L failed to obtain sufficient appropriate audit evidence with respect to the  
loans by CHIO to the D.T. Smith Group of Companies, failed to determine the  
borrowers’ ability to repay the loans, and the guarantor’s ability to cover any shortfall.  
[
2638] C&L should have insisted on receiving the financial statements of the D.T. Smith  
Group, and of the guarantor, and, failing that, should have requested permission to  
speak directly to the auditors of the D.T. Smith Group to determine why such financial  
statements were not available.  
•
Had they sought such permission and obtained it, they would have interacted  
with Strassberg and they would have learned about the significant LLP he felt the  
DT Smith group had to take.  
•
If the permission had been refused, C&L would have had to ask themselves why  
they were not allowed to speak to DT Smith’s auditor when the borrowers were  
not complying with their loan covenants.  
[
2639] Castor’s Information Memorandum advised readers that the company’s policy  
was that «loans are not to exceed 75% to 80% of the estimated market value».  
[
2640] Many of the cash flows of the DT Smith projects, particularly those generated for  
the second half of 1990 and into January and February, 1991, reflected a loan to value  
2
897  
Smith testified: «… that means that  
ratio approaching, and even exceeding, 100%.  
we’re not going to recover our loans from the sale of the units», an indication that the  
project is headed for a loss.2  
898  
[
2641] Commissions charged by CHIO to the DT Smith group for 1988, 1989 and 1990  
totalled US$27,950,000. Selman acknowledged that $15 million of those commissions  
2
899  
Selman opined that, if C&L had noted  
were not recorded or recognized as income.  
the discrepancy between the amount of income earned by CHIO from the DT Smith  
commissions according to the contracts and the amount recognized as income, they  
2
900  
In fact, C&L did note this discrepancy, as  
should have asked for an explanation of it.  
indicated in a June 13, 1990 fax from C&L in Cyprus to the attention of Bänziger, who  
2
901  
When confronted with  
replied on July 22, 1990 that he could not comment thereon.  
evidence of payments apparently made to “D.T. Smith” and “D. Smith” from that  
2
897  
See, for example, (i) Re: Dove II, PW-1114-16; PW-1114-19; (ii) Re: Dove I, PW-1115-13; (iii) Re:  
Laguna II, PW-1116-17; (iv) Re: San Marcos, PW-1117-6; PW-1117-8.  
R. Smith, June 10, 2008, p. 174.  
2898  
2899  
2900  
2901  
Selman, June 8, 2009, p. 134.  
Selman, June 8, 2009, pp. 159-161.  
PW-1530B; PW-1530.  
500-05-001686-946  
PAGE: 540  
account, Selman agreed that he would consider it unusual for Castor to be making  
2
902  
payments to the CEO of a borrower that's indebted to Castor for $238 million.  
[
2642] At the time of performing the audit, Ford was not aware that each and every one  
of the DT Smith construction projects was far behind schedule in terms of both  
completion of construction of houses and rate of sales. C&L should also have  
determined the status of the D.T. Smith construction projects, but did not do so.  
[
2643] Moreover, Ford was not aware of the agreements with Eton Properties, whereby  
2903  
0% of the profits realized from the DT Smith projects would be paid over to Eton.  
5
[
2644] In executing her work for the 1990 audit of the DT Smith loans, Ford was not  
aware that houses were never sold at anywhere near the projected rate, as set out in  
the cash flows and in the loan documentation, and that the ones that were sold from the  
second half of 1990 onwards were for prices far below what had been budgeted for.  
She did not “look at” whether houses that had been budgeted to sell for $300,000 were,  
in fact, selling for $190,000.2  
904  
2
905  
[
2645] Ford did not compare actual sales to projected sales.  
She did not know if  
there were any sales reports in Schaan or Zug (where she performed her work) with  
2
906  
respect to the DT Smith projects.  
[
2646] She confirmed that, at the time of her audit work she did not have a good  
2
907  
and did not consider it  
understanding of real estate market conditions in California  
2
908  
909  
necessary to ask.  
More significantly, she was not aware of the auctions held in the  
DT Smith projects.2  
[
2647] On discovery, when asked what valuation information was available if there was  
no appraisal, she replied: «…you have valuation from the security of the promissory  
notes that were issued. You have a Loan Agreement that states the value of those  
loans». She also testified that in instances where no appraisal was available, she saw  
2
910  
no necessity for doing additional audit work.  
[
2648] At trial, Ford testified that she considered the promissory notes to be security for  
the loans and that she had no financial information about the borrower, or issuer, of the  
promissory note, but that she had a «build-up of evidence - - from 1988 to 1989 to  
2
902  
903  
Selman, June 8, 2009, p. 158.  
2
The agreements between Eton Properties and the DT Smith companies have been produced as PW-  
1
405 – PW-1411.  
2904  
2905  
2906  
2907  
2908  
2909  
2910  
Ford, December 8, 2009, p. 138-141.  
Ford, December 8, 2009, pp. 142, 170-171.  
Ford, December 8, 2009, p. 144.  
Ford, December 8, 2009, p. 145.  
Ford, November 7, 1995, pp. 265-266.  
Ford, December 8, 2009, p. 152.  
Ford, November 7, 1995, pp. 53-54.  
500-05-001686-946 PAGE: 541  
1
990, that demonstrated that these loans (i.e. the DT Smith loans) were progressing,  
that they were coming to fruition and as time went on, I had no reason to doubt that the  
security that was given in the promissory note was a valid security.»  
2
911  
In cross-  
examination, Selman stated that in his opinion «… the number (i.e. the stated dollar  
amount) on the promissory note is evidence of the existence of the debt, it’s nothing  
2
912  
more. So, nobody could take it as representing value per se.»  
[
2649] At trial, Ford stated that she could not «recall at this moment» if she had  
2913  
compared the actual sales results with projected sales for any of the DT Smith loans.  
She acknowledged there was no evidence in her AWPs that she had looked at the  
2
914  
number of sales for the projects.  
[
2650] Ford testified that when she performed her audit work, she was not aware that all  
records of actual sales, including sales reports, were kept in Castor’s files in  
Montreal.2  
915  
[
2651] She said she had never been advised, either by Wightman or by Jean Guy  
Martin, that Smith was the contact person for the DT Smith loans or that the  
documentation for such loans was located in Montreal. She had no recollection that  
Jean Guy Martin had requested her to communicate with Ron Smith with respect to the  
2
916  
Neither Smith nor any members of his mortgage department ever  
overseas loans.  
met with any C&L representatives with respect to the loans to the DT Smith companies,  
2
917  
nor were they ever asked to provide C&L with any information.  
2652] Ford was not aware that only 70 units out of the 156 of the Wood ranch II project  
[
had been sold, of which 44 had been sold at auction at a much lower price than that  
2
918  
which had been achieved prior to the auction.  
2653] For the Dove I and II project, she testified that she made no enquiries as to how  
[
many sales had been made: she did not compare actual sales to projected sales, and  
2
919  
she looked at no sales reports.  
[
2654] In respect of Chino Hills, for year-end 1990, Ford’s working paper2920 indicates  
an appraisal value of $31,450,000 (representing the completed sell-out value of the  
project as per the appraisal report of 1988). Once again, Ford had no idea what prices  
had been achieved, and what units had been sold. She testified that such information  
2911  
2912  
2913  
2914  
2915  
2916  
2917  
2918  
2919  
2920  
Ford, December 8, 2009, pp. 159-160.  
Selman, June 4, 2009, p. 95.  
Ford, December 8, 2009, pp.. 170-171.  
Ford, December 10, 2009, pp. 6-8.  
Ford, December 8, 2009, p. 171.  
Ford, December 9, 2009, pp. 127-128.  
R. Smith, June 10, 2008, pp. 39-40.  
Ford, December 9, 2009, pp. 27-28; R. Smith, June 11, 2008, pp. 41-42.  
Ford, December 9, 2009, pp. 55-57.  
PW-1053-81, seq. p. 78.  
500-05-001686-946  
PAGE: 542  
was not available to her (although she had previously testified that sales results formed  
part of the draw requests that she looked at), and she was unaware that the entire  
portfolio of loans from CHIO to the DT Smith companies was run entirely out of  
Montreal.2  
921  
[
2655] Ford admitted that there was no evidence in her AWPs that would establish that  
the appraisal value of $31,450,000 was the appropriate value to inscribe. She  
acknowledged that «there is no separate working paper that shows any valuation work  
2
922  
besides the comparison of the appraisal value to the loan balance at that date.»  
2
923  
Selman acknowledged it was not sufficient.  
[
2656] In respect of the San Marcos project, the 1990 AWPs prepared by Ford record  
that once again the maturity date has been extended (to November 30, 1991). Apart  
from recording the amount of the loans outstanding, Ford performed no audit work to  
2
924  
She testified that she was unaware as to the status of sales.  
value these two loans.  
None of that information was available to her in Schaan: «nothing was ever shown to  
me with respect to those loans.» She sustained she had never been advised that the  
sales reports and other documentation supporting the progress of the DT Smith projects  
were retained in Montreal.2  
925  
[
2657] In respect of the Laguna II project, once again, the AWPs record that the maturity  
dates for the two loans for this project were extended from the original date of  
December 31, 1989: firstly to December 31, 1990, and then to December 31, 1991.  
Nothing evidenced audit work performed to value the loan or the security or the  
progress of this project in the AWPs. Ford was not aware as to the status of sales. She  
did not know that the prices at auction were far below the hopes of DT Smith. Her  
2
926  
answer was: «That information was not available to me in Schaan.»  
[
2658] Ford was unaware that the Circle R Ranch project (like all other DT Smith pre-  
development projects) had been put into a holding pattern by year-end 1990, to be  
reviewed again in the summer of 1991, and that nothing had been done with this project  
as at December 31, 1990  
[
2659] No evidence in her AWPs attested to a follow up to see if an appraisal had been  
2927 2928  
Ford’s AWPs indicate that an appraisal had been  
obtained for Rancho Parcel II:  
received for Rancho Parcel V, but no similar indication for Rancho Parcel II.  
2921  
2922  
2923  
2924  
2925  
2926  
2927  
2928  
Ford, December 9, 2009, pp. 64-65.  
Ford, December 9, 2009, p. 67.  
Selman, June 4. 2009, pp. 40-42, 63-64.  
PW-1053-81, seq. p. 78; Ford, December 9, 2009, p. 77.  
Ford, December 9, 2009, pp. 82-83.  
Ford, December 9, 2009, pp. 90, 93.  
Ford, December 9, 2009, pp. 111, 115, 118, 120.  
PW-1053-81, seq. p. 78.  
500-05-001686-946  
PAGE: 543  
[
2660] As to the Ritz Pointe project, Ford was not aware that the project had been  
placed into a holding pattern and that there was litigation with the municipality relating to  
2
929  
density and the number of units that could be built.  
However, in her audit working  
930  
Notwithstanding such a note, Ford was unable to identify evidence  
paper she noted: «Request update of additional security; loan balance exceeds  
2
appraisal value.»  
in her AWPs of any details with respect to an updated appraisal, such as the date, the  
2
931  
state of the property, the value set out in the appraisal, or anything else.  
2661] In respect of Rancho California project, Ford confirmed that no additional audit  
[
work was done (over and above what she claims to have done for year-end 1989) to  
2
932  
2933  
Her AWPs record that  
support using the higher appraisal value of $33.2 million.  
the maturity date for this loan was extended to July 31, 1991; Ford was not aware that  
virtually none of the offsite costs to improve the site ready for finished lots (ready for  
2
934  
construction) had been incurred.  
[
2662] In respect of the Walker Basin project, the working papers for 1990 contain  
Ford’s following notations: «Secured promissory note $13,000,000» and «Assignment  
2
935  
There is no reference as to whether  
of Trust Deeds $5,000,000 and $5,180,000».  
the “Secured Promissory Note” is from the borrower and Ford has no recollection as to  
2
936  
who issued the promissory note.  
[
2663] Ford’s working paper does not record the rank of the two trust deeds, although  
C&L’s audit program included a determination of the rank of a mortgage and the amount  
of any prior ranking debt.  
[
2664] Ford failed to note that the $5 million trust deed, which was assigned to Castor,  
ranked behind a first mortgage of $5.18 million in favour of a third party. There is no  
reference as to who the prior ranking creditor was.  
[
2665] Ford failed to select the Walker Basin loans for review, even though such loans  
had increased by $7 million, the maturity date had been extended to July, 1991, and no  
appraisal was available for the previous year’s audit. In her words: «Not having an  
appraisal report or not following up on the appraisal report did not trigger any particular  
concern. »2  
937  
2929  
2930  
2931  
2932  
2933  
2934  
2935  
2936  
2937  
Ford, December 9, 2009, pp. 138, 140.  
PW-1053-81, seq. p. 78.  
Ford, December 9, 2009, pp. 141-142.  
Ford, December 9, 2009, p. 160.  
PW-1053-81, seq. p. 81.  
Ford, December 9, 2009, p. 161; R. Smith, June 11, 2008, p. 115.  
PW-1053-83, seq. p. 121.  
Ford, December 9, 2009, pp. 163-164.  
Ford, December 9, 2009, pp. 187-188.  
500-05-001686-946  
PAGE: 544  
Information C&L knew or could have known, had they comply  
with GAAS  
[
2666] The information available or that could have been available to the auditors to  
complete their audit, to estimate the loan loss provisions and to assess whether  
revenue had reasonable assurance of collectability, had they comply with GAAS, has  
been identified during testimony of Plaintiff’s experts, and is documented in Plaintiff  
experts’ written reports.2  
938  
[
2667] In the following paragraphs, and before she starts discussing the issue of fraud,  
the Court only draws-up a non-exhaustive wrap-up of what C&L knew, should have  
known or could have known about Castor’s borrowers and their relationships with  
Castor, and about the performance, the collectability and the carrying value of Castor’s  
loans, had they complied with GAAS.  
Y H group and Y H Corporate loans  
[
2668] Stolzenberg and Wersebe were long time business partners. From 1978 and  
until 1987 when Wersebe transferred his Castor’s interests to Stolzenberg, both were  
heavily involved in Castor’s business and affairs. From the early 80s, they were also  
involved together in MLV.  
[
2669] After 1987, Stolzenberg became the mastermind of Castor, and Wersebe  
concentrated on the YH Group activities.  
[
2670] Interest and fees on the Castor’s loans to the YH group were seldom, if ever,  
2939  
paid in cash: they were systematically capitalized , as the accounting books  
2
940  
This was the case notwithstanding the loan covenants that called for  
disclosed.  
monthly payments of interest. Capitalization of interest was unplanned.  
2
938  
939  
For example, in the case of MLV : PW-2908, Vol. 2, A-3 to A-19 (1988), A-20 to A-29 (1989) and A-30  
to A-36 (1990); PW-2941, Vol. 3, pp. 4-8, 55-59 (1988-1990); PW-3033, Vol. 2, Appendix D, pp. 1 to  
4
8 (1988-1990). For the other projects, see the other chapters of PW-2908, vol.2, the various  
volumes of PW-2941 and the other appendices of PW-3033, vol. 2.  
2
For examples: the interest on a series of loans to YHDL was being capitalized each month to account  
0
46/Loan 1153(PW-87). Interest on the YHDL portion of the Meadowlark loan was being similarly  
capitalized until 1990 (see PW-1112G, analysis of Ron Smith relying on PW-167, PW-103 and PW-  
8
5, p. 673 and PW-86, p. 587. This appears every month in the General Journals.). YHDL’s  
guarantee of the MLV debenture holders’ obligations to CHIF was satisfied in a similar fashion  
through the inter-company Zug/Enar account (PW-100, pp. 41, 47)  
2940  
PW-2908, Vol. 1, p. 5-12; PW-1485R; Vance, March 6, 2008, pp. 147-155.  
500-05-001686-946  
PAGE: 545  
[
2671] In December of each year, Castor and YH proceeded to a year-end reallocation  
from account 046. Existing loans and new loans were part of these reallocations, as the  
General Journal shows.2  
941  
[
2672] The commitment letters and loan agreements (which C&L supposedly reviewed)  
called for audited and unaudited financial statements of the borrowers to be provided to  
Castor.2  
942  
[
2673] Castor’s borrowers had no choice but to provide those financial statements. In  
turn, Castor had to make those documents available to C&L, when asked. Without  
SAAE, which necessarily includes financial statements of Castor’s borrowers, C&L  
could not issue and should not have issued an unqualified audit report.  
[
2674] In 1987, C&L obtained audited financial statements of YHDL as at September  
2
943  
No subsequent audited financial  
3
0, 1986: they are included in the 1987 AWPs.  
statements of YHDL were issued thereafter. C&L should have asked why.  
[
2675] Constantly, Castor had to offer financial support to allow YH to meet its overhead  
and other expenses (as the correspondence files and loan ledger cards show). C&L  
should have asked why. At first glance, save for financial difficulties the borrowers were  
going through or an undisclosed related party relationship, making loans stipulating that  
the interest should be paid monthly and renewing them each year to reallocate unpaid  
interest, fees and support payments made little commercial sense, if any.  
[
2676] Evidence as to the financial condition of the borrowers, the net worth of the  
guarantor, Wersebe, and the nature and enforceability of the securities held by Castor  
was essential. Without receiving and reviewing current financial statements of YHDL,  
YHDHL, KVWIL and related borrowers, C&L could not comply with its obligation to  
gather SAAE in relation to the YH corporate loans.  
[
2677] Finally, cash from these borrowers had not been collected for years, and was not  
collected during the first eleven months of 1990, but $40 million came in at year-end  
1
990. C&L should have investigated how and why.  
2
941  
PW-84, bates p. 000573 (1988); PW-85, bates p. 000566 (1989); PW-86, bates p. 000485 (1990). In  
1
990, Account 046 became loan #1153, part of account 065, but there was no change to how the YH  
interest was treated  
2942  
943  
For example, PW-1058-1, PW-1063-1, PW-1054-3-1, PW-1059-6  
PW-1053-27, seq. pp. 164-172  
2
500-05-001686-946  
PAGE: 546  
T S H  
[
2678] The loans to Topven, Topven (1988) and Lambert were connected to the TSH.  
2679] There were TSH-related loans in the Montreal portfolio and in the overseas  
[
portfolio.  
[
2680] Aggregation of all those loans was a must: C&L needed to act, to exercised  
professional judgment, based on a “global picture”.  
[
2681] The loans were made and renewed since the early 80s without any credit review  
of the borrower. At first glance, this made little commercial sense, if any.  
[
2682] The loan documents required the monthly payment of interest, annual fees and  
annual financial statements. Castor’s borrowers had no choice but to provide Castor  
with financial statements. In turn, Castor had to make them available to C&L, when  
asked. Without SAAE, which necessarily includes financial statements of all the  
borrowers related to the TSH, C&L could not issue and should not have issued an  
unqualified audit report.  
[
2683] Although the TSH was an operating property and should have been able to  
2944  
contrary to the  
service its debts, interest was being capitalized on the Topven loans  
loan agreements, and on the Lambert loans contrary to its loan documents, at least as  
early as 1984.2 Capitalization of interest was unplanned.  
945  
[
2684] Castor was paying fees and operating expenses of borrowers ( as the mortgage  
2946  
and loan ledger cards clearly show).  
[
2685] The audited financial statements of Topven included in previous years’ AWPs  
disclosed the rapidly increasing losses being reported by this entity. C&L should have  
continued to obtain such financial statements or determine why they were no longer  
available.2  
947  
[
2686] The 1987 Restated Operating Results for Topven, provided by Castor to C&L for  
2948  
the 1987 audit, disclosed income before debt and depreciation of only $2.9 million.  
[
2687] The actual financial results of the hotel were below the projections on which the  
2949  
available appraisal was premised.  
2944  
2945  
2946  
2947  
2948  
PW-1081A  
PW-1053-3, sequential page 477  
PW-167D.  
See PW-424, PW-429, PW-430  
D-138-1: Summary Income Statement entitled "Topven Holdings Ltd. 1987 Restated Operating  
Results" and Proforma Income Statement – 1988 Budget. See also PW-1053-93, sequential pages  
153-154 (B28A and B28B).  
500-05-001686-946  
PAGE: 547  
[
2688] Castor was assuming 100% of the financing risk for the TSH loans, contrary to  
2950  
the loan-to-value ratio of 75-80% in its promotional materials.  
[
2689] At first glance, and save for financial difficulties the borrowers were going  
through or an undisclosed related party relationship, there was little commercial sense,  
if any, to make loans and to renew them each year (increasing therefore Castor’s  
exposure) to reallocate unpaid interest, fees and support payments.  
CS H  
[
2690] The loans to Skyeboat, 321351 and Skyview were connected to the CSH.  
2691] There were CSH-related loans in the Montreal portfolio and in the overseas  
[
portfolio: all loans needed to be aggregated.  
[
2692] The CSH project had been on Castor’s books since the early 80s and was  
2951  
refinanced in 1988.  
2
952  
plus a  
[
2693] As at year end 1987, the loans already amounted to $49.3 million,  
contingent liability of $3.6 million and accrued interest receivable. Consequently, even  
before the 1988 refinancing, Castor’s exposure exceeded the lower range of the  
estimate of value provided in an available appraisal or market study report (PKF).  
[
2694] The loan documents required payments of interest and placement fees, and  
remittance of annual financial statements of Skyview. Interest and placement fees were  
capitalized, and no financial statements were available. Why?  
[
2695] Castor’s borrowers had no choice but to provide financial statements. In turn,  
Castor had to make them available to C&L, when asked.  
[
2696] The financial statements of Skyview, Skyeboat and 321351 all disclosed  
significant losses.  
[
2697] The financial statements of the CSH disclosed actual results far below the  
projections of income that the value in the appraisal was based on.  
[
2698] The appraisal assumed renovations, the cost of which would have to be  
deducted from the appraised value, to determine what amount was available as  
2
949  
Given that C&L would have seen that this value estimate existed if they had read the Gillis appraisal,  
the Court rejects the suggestion that the information was concealed.  
PW-2941, Vol. 2, p. 10.; see also PW-1057-1, PW-1057-2 and PW-1057-3  
Ron Smith September 5, 2008, pp. 147-148; PW-1053-23, seq. p. 168  
Based on the audit confirmation returned to C&L, PW-1053-27, seq. pp. 215-218, 230-231 (E212–  
E215, E227–E228)  
2950  
2951  
2952  
500-05-001686-946  
PAGE: 548  
collateral. The planned renovations were not realized even though the appraisal  
assumed that the renovations would be completed by February 1988.  
[
2699] Castor was assuming 100% of the financing risk for the CSH loans, contrary to  
2953  
the loan-to-value ratio of 75-80% that it asserted in its promotional materials.  
[
2700] Again, and save for financial difficulties the borrowers were going through, or an  
undisclosed related party relationship, nothing justified why loans were being made and  
renewed each year to reallocate unpaid interest, fees and support payments to a  
business in operation, which was neither a project under construction nor a project  
under development.  
OS H  
[
2701] The loans associated with the OSH were in default, non-performing and the  
project was in severe financial difficulty. Castor was curing all such defaults from its own  
resources. Why?  
[
2702] Interest on loan 1049 was capitalized on a monthly basis to account 046.  
[
2703] Placement fees, interest, advances and legal fees on loan 1152 were all  
2
954  
capitalized.  
2
955  
[
2704] Interest on loan 1166 and on the transferred loan of 687292 was capitalized  
together with all placement fees, advances and legal fees.  
[
2705] Under the terms of the loans, the borrower had to provide annual financial  
statements, revenue and expense statements, rent rolls and statement of capital  
expenditures when requested by Castor; the borrower had to pay all accounts payable  
2
956  
None of these covenants was  
and taxes owing on the lease and FF&E, when due.  
being fulfilled, in addition to the failure to pay interest and fees, when due. Why?  
[
2706] The expenditures upon which the Fitzsimmons appraisal had been premised had  
not been done: was the proposed value still reasonable?  
[2707] Having and looking at financial statements of borrowers was a must.  
[
2708] Again, and save for financial difficulties the borrowers were going through, or an  
undisclosed related party relationship, nothing justified why loans were being made and  
renewed each year to reallocate unpaid interest, fees and support payments to a  
2953  
2954  
2955  
2956  
PW-2941, Vol. 2, p. 131  
PW-167W  
PW-167X  
See for example PW-1093-1  
500-05-001686-946  
PAGE: 549  
business in operation, which was neither a project under construction nor a project  
under development.  
M L V  
[
2709] There were MLV-related loans in the Montreal portfolio and in the overseas  
portfolio.  
[
2710] Aggregation of all those loans was a must: C&L needed to act, to exercise  
professional judgment, based on a “global picture”.  
[
2711] The payment of interest and of renewal fees was not made from the cash  
resources of any borrower.  
[
2712] General Journal entries were made each month to document the capitalization of  
interest on the debenture holder loans to the inter-company account.  
2
957  
documented the capitalization of interest due  
[
2713] The yellow card for loan 1105  
on loans 1126 and 1105.  
[
2714] The monthly journal memos documented that interest on loan 1048 was  
capitalized to account 046/loan 1153, on a monthly basis.  
[
2715] Castor was funding MLVII’s interest obligations to the debenture holders  
primarily through account 046.  
[
2716] The terms and conditions of the commitment letters and extension letters, as well  
as the loan documentation in connection therewith, called for the payment of monthly  
interest, annual fees and for the supply of financial information. The borrowers were in  
chronic breach of all of such covenants. Why?  
[
2717] The loan documents required the payment of interest and fees, and the  
remittance of annual financial statements. Castor’s borrowers had no choice: they had  
to provide Castor with financial statements. In turn, Castor had to make those financial  
statements available to C&L, when asked. Without SAAE, which necessarily includes  
financial statements of all the borrowers related to MLV, C&L could not issue and  
should not have issued an unqualified audit report..  
[
2718] Real estate taxes were constantly in arrears, and Castor was obliged to advance  
2958  
funds at the last minute to pay the taxes in order to avoid a tax sale (Loan 1105).  
Late payment of taxes is documented on the draft 1987 financial statement of MLVII,  
included in the 1988 AWPs.  
2
957  
958  
PW-1074-3A  
2
Ron Smith, May 14, 2008, pp. 139-140, 183  
500-05-001686-946  
PAGE: 550  
[
2719] The exposure of CHL to the MLV project included loan 1048 to YHLP, in the  
amount of $14 million, and loan 1125 to KVWIL, in the amount of $7.2 million.  
[
2720] The operations of the MLV project were seasonal with the peak occupancy  
period in July and August and minimal occupancy during the winter months.  
th  
[
2721] The 7 draft of the unaudited financial statements of MLVII revealed substantial  
operating losses in the context of and notwithstanding the very significant financial  
2
959  
support from York Hannover related entities.  
[
2722] The appraisal used by the audit staff in 1988 was over 5 years old and assumed  
major renovations which had not been made.  
[
2723] The value in the Hughes appraisal,2960 dated July 1988, was only $67.7 million  
without renovations.  
[
2724] A sale of the MLV project for a price between $90 million to $100 million (which is  
2
961  
reflected on AWP E41 ) would have resulted in a very significant loss to Castor.  
[
2725] Statements made to Wightman during the year-end wrap up meeting of the 1986  
2962  
regarding refinancing, sale of the project and reduction of the MLV loans, had  
audit,  
failed to materialize.  
[
2726] The Mellon Bank financing did not go through. Why had this desperately  
2963  
refinancing aborted?  
needed  
2
964  
[
2727] Significant operating deficits were funded by Castor  
and the operations of the  
965  
Castor was obliged to make systematic and  
2
MLV project had significant problems.  
ongoing support payments to lenders in an attempt to stave off foreclosure.  
2
966  
[
2728] Again, and save for financial difficulties the borrowers were going through, or an  
undisclosed related party relationship, nothing justified why loans were being made and  
renewed each year to reallocate unpaid interest, fees and support payments to a  
business in operation, which was neither a project under construction nor a project  
under development.  
M EC  
2
2
2
2
2
959  
960  
961  
962  
963  
PW-1053-23, seq. pp. 155-166; Ron Smith, May 16, 2008, pp. 83-89.  
PW-494, bates p. 000008  
PW-1053-23, seq. p. 117  
PW-1053-3, seq. p. 474  
See the going concern note in the draft 1987 MLVII financial statement based on the realization of  
such financing.  
2964  
2965  
2966  
PW-1070H  
See, for example, PW-1070G-2, PW-1070G-3, PW-1070G-4  
See, for example, PW-1070F-2, PW-1070F-4, PW-1070F-5  
500-05-001686-946  
PAGE: 551  
[
2729] The loan documentation indicated that Stolzenberg was the incorporator and  
director of 97872. This information was contained in the closing binders which were  
made available to C&L.  
[
2730] The loan documentation for the various loans indicated the cases where interest  
was payable monthly.  
2
967  
and the General Journals  
[
2731] It was obvious from the review of the yellow cards  
that interest was being capitalized each month either to account 046 or to the equity  
loans 1145 and 1042.  
•
•
The General Journals that were available to Castor indicated that interest on  
loan 1042 was being capitalized each month to account 046.  
The General Journals disclosed that the year-end increases to loan 1042  
were utilized to reclassify unpaid interest on account 046.  
[
2732] The disbursement of the loans was conditional upon obtaining legal opinions as  
to the validity of the security. In respect of the equity loan to YHDL, loan 1042, the  
commitment letters called for the provision of legal opinions regarding the validity of the  
security. Had C&L sought such legal opinions, it would have ascertained that no  
security had been registered in 1988 and 1990 in respect of loan 1042 and that in 1989,  
the security was limited to a principal sum of $14 million even though the loan amount  
was $24 million.  
[
2733] Legal opinions were available or should have been sought to ascertain whether  
the equity loans were secured by mortgages. In fact, loan 1145 was never secured by  
any mortgage in favour of Castor; rather, the only alleged “security” it held was a  
promissory note.  
[
2734] According to the commitment letters, 97872 undertook to provide annual and  
2968  
interim financial statements.  
[
2735] In the case of the second mortgage financing, the commitment letter specifically  
provides that each of 97872 and YHDL were required to provide audited annual  
financial statements as well as various other financial information regarding the  
projects.2  
969  
2967  
2968  
2969  
PW-167  
PW-1103-5  
PW-1102A-3  
500-05-001686-946  
PAGE: 552  
[
2736] Castor’s borrowers had no choice: they had to provide Castor with financial  
statements. In turn, Castor had to make those financial statements available to C&L,  
when asked. Without SAAE, which necessarily includes financial statements of all the  
borrowers related to MEC, C&L could not issue and should not have issued an  
unqualified audit report.  
[
2737] C&L could have and should have ascertained whether the borrowers were  
satisfying their obligations to the BMO syndicate. C&L would have realized that the  
borrowers were not providing the equity contributions required from their own resources.  
[
2738] The loan documentation revealed that the project had a budget of $195 million  
2970  
The commitment letter called upon the  
and a completion date of January 31, 1990.  
borrowers to provide reports from the project monitor with each draw request. C&L  
could have and should have sought copies of the reports prepared by Helyar which  
2
971  
the  
indicated the extent of the cost overruns. In the same commitment letter  
borrowers covenanted to «promptly fund any cost overruns over $10M». In fact, the  
cost overruns exceeded $100 million and such deficiencies were funded by Castor.  
[
2739] To the extent that C&L was relying on the possibility of a new appraisal being  
issued to overcome the security deficiency that they themselves determined for the  
1
990 audit, it was incumbent upon C&L to seek and obtain SAAE to justify accepting  
that such a new appraisal (between $300-350 million) would be issued. Had C&L  
insisted upon receiving an updated appraisal from Royal Lepage, it would have readily  
ascertained that, rather than increasing, the appraised value of the MEC had  
significantly decreased. Royal LePage did appraise the MEC at $241 million, as of  
September 1, 1990.2  
972  
[
2740] Palace II undertook to provide annual financial statements, revenue and expense  
2973  
The commitment letter called for Palace  
statements and other financial information.  
II to pay interest to CHIF. A review of the mortgage and loan ledger card in Montreal for  
loan 1146 clearly revealed that all interest and fees on the CHIF loan were being  
capitalized to a grid note in Montreal.  
T WT C  
2970  
2971  
2972  
2973  
PW-1102A-4  
PW-1102A-4, p. 9 of Mortgage Loan Summary  
PW-1108B  
PW-285  
500-05-001686-946  
PAGE: 553  
[
2741] More than sufficient evidence was available to C&L to ascertain that the TWTC  
loans were non-performing and that the borrowers were in default of their loan  
covenants.  
[
2742] Had C&L competently reviewed the loan documentation, the General Journals  
evidencing the capitalization of interest to account 046/Loan 1153, the yellow cards for  
loans 1046 and 1149, and insisted upon receiving the financial statements that were  
called for in the loan agreements, C&L would have readily ascertained the problems  
associated with these loans.  
[
2743] Castor’s borrowers had no choice but to provide Castor with financial statements.  
In turn, Castor had to make them available to C&L, when asked. Without SAAE, which  
necessarily includes financial statements of all the borrowers related to the TWTC, C&L  
could not issue and should not have issued an unqualified audit report.  
[
2744] Moreover, had C&L sought information regarding the use of the loans advanced  
by C&L, and determined the amount of prior ranking debt at the project level, C&L  
would have ascertained that Castor’s position was highly precarious, especially in view  
of the fact that it could not register its security.  
[
2745] Furthermore, had C&L sought SAAE such as the alleged “offers” received for the  
TWTC lands, they would have ascertained that no offers had been received but, rather,  
merely a brokerage mandate had been granted to Coldwell Banker. They should have  
furthermore sought information as to why such mandate was being relied upon 14  
months later for the 1990 audit when no sale had occurred, and when clearly the market  
value for the property was far below that which had been indicated on the LEQs.  
[
2746] Finally, once C&L ascertained the high risk nature of loan 1149, it should have  
sought information regarding each of the TWTC loans and, had it done so, would have  
been compelled to insist that those loans be placed on a non-accrual basis and no  
revenue recognized in connection therewith.  
M eadowlark  
500-05-001686-946  
PAGE: 554  
[
2747] Interest was capitalized in 1988 and 1989, 50% to account 046 and 50% to the  
Raulino grid note: this was fully disclosed in the books and records of Castor including  
2
974  
.
the General journal entries each month  
[
[
2748] The borrowers were not complying with their loan covenants.  
2749] Castor’s borrowers had no choice but to provide Castor with financial statements.  
In turn, Castor had to make them available to C&L, when asked..  
D T S mith  
[
2750] All required information was available for C&L to review had they interacted with  
Ron Smith: loan files, correspondence files, security files, draw requests, cash flows,  
2
975  
appraisals and financial statements.  
2751] Ron Smith was managing the DT Smith loans, and was the person to  
[
communicate with to obtain information relating thereto. As a matter of fact, Wightman  
2
976  
thought and expected that Ford would discuss the DT Smith loans with Ron Smith.  
[
2752] Castor’s borrowers had no choice but to provide Castor with financial statements  
and financial information. In turn, Castor had to make them available to C&L, when  
asked. Without SAAE, which necessarily includes financial information relating to the  
DT Smith projects, C&L could not issue and should not have issued an unqualified audit  
report.  
2
974  
975  
PW-103; PW-1112G  
2
Ron Smith, June 10, 2008; see for example: PW-1113C, PW-1113D, PW-1113E, PW-1113F, PW-  
1
113H, PW-1114 (binder); PW-1115 (binder); PW-1116 (binder)  
2976  
PW-1053-81-2, PW-1053-83-5, PW-1053-84-5; Wightman, February 10, 2010, p. 43-44  
500-05-001686-946  
PAGE: 555  
Fraud is not a defense in the circumstances  
P ositions (in a nutshell)  
Defendants  
[
2753] If the Court concludes that their consolidated audited financial statements are  
materially misstated and misleading, C&L asserts they should not be held liable  
because they were victims of fraud and misrepresentations by management: fraud  
prevented the detection of misstatements.  
[
2754] Defendants argue that Castor deliberately concealed relevant information from  
them, that Castor’s conduct in the context of the audit was fraudulent.  
[
2755] Defendants submit that the fraud was primarily intended to conceal from C&L the  
complete nature, extent and performance of the YH Group of loans with Castor,  
Castor’s dealings with related parties, the $100 million debenture and the restricted  
cash.  
[2756] Defendants describe the components of such fraud as follows:  
intentional omissions and deliberate misrepresentations to the auditors relating to  
such financial statements matters as: 1) the relationship between Castor and its  
borrowers; 2) restrictions on Castor’s assets; 3) false representations to C&L  
made by third parties by way of false confirmations; 4) the payment of fraudulent  
fees in connection with Castor’s loans; 5) the German bank window dressing  
transactions; 6) the diversion of loan renewal fees paid by DT Smith; 7) the  
$
100MM debenture; 8) management’s appraisal and knowledge of Castor’s  
loans and the status of its borrowers; 9) the use of year end circular transactions  
to improve the performance of the loans; and, 10) the back dating of documents  
and loan agreements by the creation of fictitious agreements and  
2977  
transactions.  
[
2757] Defendants argue the Court must consider the impact of fraud on the planned  
scope and probable results of a GAAS audit.  
[
2758] Defendants suggest that evidence shows that C&L were deprived of the  
opportunity to exercise their professional judgment on a full set of facts.  
[
2759] Defendants allege that the fraud committed by Castor management and others  
was such that the normal application of GAAS would not have uncovered the alleged  
departure from GAAP.  
2977  
Defendants written submissions, July 8, 2010, p. 209  
500-05-001686-946  
PAGE: 556  
Plaintiff  
[
2760] Plaintiff says:  
•
•
Information to perform an audit in accordance with GAAP and GAAS was  
accessible to C&L or could have been accessible to C&L, had C&L requested it  
as it should have; and  
Information that should have raised concerns, “red flags”, was seen by C&L or  
mentioned by C&L in their audit working papers, but C&L negligently failed to act  
on it.  
[
2761] Plaintiff argues if C&L had performed their audit work and prepared their other  
work products in conformity with GAAP, GAAS and other applicable professional  
standards, unqualified audit reports and consolidated audited financial statements, and  
valuation letters and Certificates for Legal for Life Opinions, like the ones issued by  
C&L, would not have been and could not have been issued.  
[
2762] Consequently, Plaintiff pleads it is irrelevant whether there was a fraud or not  
given C&L’s negligence, C&L’s numerous failures to act in accordance with GAAP, with  
GAAS and with the other professional standards applicable to them or to their work.  
Court’s conclusion  
[
2763] In the circumstances revealed by the evidence, and even though fraud might  
have been a barrier to the auditors identifying irregularities, the alleged fraud and  
misrepresentations by Castor’s management cannot serve to relieve C&L of the  
responsibility arising from their improper and deficient performance as accountants and  
auditors.  
F raud: definition  
[
2764] The CICA Handbook, as it read in 1988, 1989 and 1990, defines error and fraud  
at section 5300.43, as follows:  
Error refers to mistakes affecting the financial statements such as:  
(
(
(
i)  
arithmetical or clerical mistakes;  
ii)  
iii)  
misapplication of accounting principles; and  
the oversight or misinterpretation of facts;  
500-05-001686-946  
PAGE: 557  
Fraud refers to acts committed with an intent to deceive involving either  
misappropriation of assets or misrepresentations of financial information either to  
conceal misappropriations of assets or for other purposes, by such means as:  
(
i) manipulation, falsification or alteration of records or documents;  
ii) suppression of information, transactions or documents;  
iii) recording of transactions without substance; and  
(
(
(
(
iv) misapplication of accounting principles.  
our emphasis)  
F raud and the auditor (1988, 1989 and 1990)  
[
2765] An auditor does not have the duty to detect fraud, to detect acts committed with  
intent to deceive.  
[2766] An auditor expresses an opinion; he does not give a guarantee.  
[
2767] It is the duty of an auditor to bring to bear on the work he has to perform that  
skill, care, and caution which a reasonably competent, careful, and cautious auditor  
would use.2  
978  
[
2768] An auditor is not bound to be a detective, or, as was said, to approach his work  
with suspicion, or with a foregone conclusion that there is something wrong. He is a  
2
979  
watchdog, but not a bloodhound.  
[
2769] Auditors must not be made liable for not tracking out ingenious and carefully laid  
schemes of fraud, when there is nothing to arouse their suspicion ...So to hold would  
2
980  
(our emphasis).  
make the position of an auditor intolerable  
[
2770] To afford a reasonable basis to support the content of their audit report,  
according to GAAS, auditors have to obtain sufficient appropriate audit evidence by  
such means as inspection, observation, enquiry, confirmation, computation and  
2
981  
Sufficiency and appropriateness are interrelated. Sufficiency is the  
analysis.  
measure of the quantity of audit evidence obtained and appropriateness is the measure  
of its quality.2  
982  
2
2
2
2
978  
979  
980  
981  
In Re Kingston Cotton Mill Company, [1896], 2 Ch.279, Lord Lopes, at page 288  
In Re Kingston Cotton Mill Company, [1896], 2 Ch.279, Lord Lopes, at page 289  
In Re Kingston Cotton Mill Company, [1896], 2 Ch.279, Lord Lopes, at page 290  
For 1988, PW-1419-1A, section 5100 and section 5300.01;For 1989, PW-1419-2A section 5100 and  
section 5300.01; For 1990,PW-1419-3A section 5100 and section 5300.01  
2982  
For 1988, PW-1419-1A, section 5300.09; For 1989, PW-1419-2A, section 5300.09; For 1990, PW-  
1419-3A, section 5300.09  
500-05-001686-946  
PAGE: 558  
[
2771] One italicized recommendation of GAAS is that the auditor should perform  
2983  
substantive auditing procedures.  
[
2772] The following factors influenced the auditor’s judgment as to what is sufficient  
appropriate evidence:  
•
•
•
Materiality;  
Inherent risk and control risk consideration;  
The experience gained during previous audit examinations as to the reliability of  
the client’s records and representations;  
•
•
The persuasiveness of the evidence; and  
Fraud or error found while performing the audit procedures.2984  
[
2773] The auditor recognizes that financial statements may be misstated as a result of  
2985  
Accordingly, in obtaining sufficient appropriate audit evidence, the  
fraud or error.  
auditor seeks reasonable assurance, through the application of procedures that comply  
with GAAS, that fraud and error which may be material to the financial statements have  
not occurred or that, if they have occurred, they are either corrected or properly  
2
986  
accounted for in the financial statements.  
[
2774] If an auditor fails to adhere to GAAS, he runs a risk of not detecting a  
misstatement resulting either from error or fraud.  
[
2775] A failure to discover an error or fraud does not necessarily indicate that an  
auditor has failed to adhere to GAAS, but he might have.  
[
2776] When he encounters circumstances such as conflicting evidence on important  
matters, unusual transactions by virtue of their nature or complexity, particularly close to  
the year end, information being provided unwillingly or only after unreasonable delay,  
limitation in the scope of the examination imposed by management or identification of  
important matters that were previously undisclosed, an auditor shall question himself  
2
987  
and wonder if the financial statements might be materially misstated.  
2983  
2984  
2985  
2986  
2987  
For 1988, PW-1419-1A, section 5300.08; For 1989, PW-1419-2A, section 5300.08; For 1990, PW-  
419-3A, section 5300.08  
For 1988, PW-1419-1A, section 5300.10; For 1989, PW-1419-2A, section 5300.10; For 1990, PW-  
419-3A, section 5300.10  
For 1988, PW-1419-1A, section 5300.44; For 1989, PW-1419-2A, section 5300.44; For 1990, PW-  
419-3A, section 5300.44  
For 1988, PW-1419-1A, section 5300.44; For 1989, PW-1419-2A, section 5300.44; For 1990, PW-  
419-3A, section 5300.44  
For 1988, PW-1419-1A, section 5300.49; For 1989, PW-1419-2A, section 5300.49; For 1990, PW-  
419-3A, section 5300.49  
1
1
1
1
1
500-05-001686-946  
PAGE: 559  
[
2777] An auditor shall also be alert to the possibility that management lacks good faith  
when he encounters circumstances such as information being provided unwillingly or  
only after unreasonable delay, limitation in the scope of the examination imposed by  
management or identification of important matters that were previously undisclosed.2988  
[
2778] If an auditor suspects the existence of fraud or error, he needs to perform  
procedures to support or dispel his suspicion. Unless the circumstances clearly indicate  
otherwise, the auditor is not justified in assuming that an instance of fraud or error is an  
isolated occurrence.  
[
2779] The CICA handbook includes the following italicized section: The auditor should  
assess the audit implications of all frauds and errors which come to his attention and  
2
989  
consider their effect on the financial statements.  
[
2780] While they do not have an obligation of result, auditors have an obligation of  
means and diligence. Auditors need to be aware of the possibility of material fraud.  
Auditors have to evaluate the risk of material fraud. They are expected to plan their  
audits to address the risks. They have to conduct their audits to address appropriately  
such risks.  
[
2781] When auditors do not act accordingly, and it is shown that their audit results  
would have been different had they discharged their obligation properly, auditors  
engage their professional responsibility.  
Experts opinions  
Defendants’ experts  
[
2782] Two Defendants’ experts expressed comments on fraud: Selman and Levi.  
2783] Selman’s comments were general comments. Levi’s mandate was specific to the  
[
issue of fraud.  
Selman  
[
2784] Selman opined there was fraud, as defined by the handbook, in the 1988, 1989  
and 1990 audits.  
[
2785] Selman suggested to the Court that, for each of the relevant years (1988, 1989  
and 1990), she should consider twofold of the fraud issue:  
2
988  
989  
For 1988, PW-1419-1A, section 5300.56; For 1989, PW-1419-2A, section 5300.56; For 1990, PW-  
419-3A, section 5300.56  
For 1988, PW-1419-1A, section 5300.52; For 1989, PW-1419-2A, section 5300.52; For 1990, PW-  
419-3A, section 5300.52  
1
2
1
500-05-001686-946  
PAGE: 560  
•
The immediate and specific impact of fraud on any identified section of the  
audit.  
•
The general impact of fraud on the audit, as a whole.2990  
[
2786] Selman explained the obligation of an auditor to gather sufficient appropriate  
2991  
audit evidence to meet the objectives of section 5300.17 of the Handbook . He added  
that once the auditor has gathered such evidence, he or she stops performing  
procedures.2  
992  
[
2787] Selman said that he had set out in his report, at paragraphs 4.1.11 to 4.1.52 and  
in section 6.3, what he considered to be misrepresentations amounting to fraud in the  
2
993  
sense of the Handbook definition.  
2788] Selman mentioned that a requirement for the auditor to develop auditing  
[
procedures that were designed to detect fraud had been brought into the Handbook, as  
2
994  
part of a normal audit, but only after the relevant years.  
2789] Even though he acknowledged that information was in Castor’s accounting  
[
records, Selman said concealment could exist within the records, by misdirection, an  
2
995  
audit not being intended to be a forensic exercise to root out the evidence of fraud.  
[
2790] Selman said “Management has a responsibility to bring forward the information  
to the auditor that is relevant” and “To suggest that if the auditors didn't ask for it, it  
wasn't concealed or suppressed is, in my view, incorrect from the point of view of an  
auditor”.2  
996  
[2791] Selman wrote :  
•
•
“An auditor is expected to be aware of the possibility that fraud exists within the  
records that are being audited and that matters under examination are being  
misrepresented”.2  
997  
“…an auditor needs to evaluate the information he sees and hears and be  
reasonably satisfied that it is being appropriately described. And, if he finds  
2
998  
something that raises his suspicions he needs to probe further”  
2990  
2991  
2992  
2993  
2994  
2995  
2996  
2997  
2998  
Selman, May 5, 2009, pp.70-72  
PW-1419-1A (1988); PW-1419-2A (1989); PW-1419-3A (1990)  
Selman, May 5, 2009, pp. 78-81  
Selman, May 6, 2009, pp.62-63, p. 95, pp.105 and following  
Selman, May 6, 2009, p.66; Selman, May 19, 2009, pp.26-27  
D-1295, p.239; Selman, May 6, 2009, pp.66 and following  
Selman, May 6, 2009, p.121  
D-1295, p. 228  
D-1295, p. 230; Selman, May 6, 2009, pp.82-83  
500-05-001686-946  
PAGE: 561  
[
2792] Asked to comment on the methodology and on the tapestry analogy used by  
Froese, one of Plaintiff’s experts (the relevant extract of the testimony of Froese is  
reproduced later under the subheading “Froese” of this section), Selman said it was an  
interesting analogy, but that he had never seen that methodology used before.2  
999  
[
2793] Selman opined that account 046 was “a normal and usual procedure”.3000 He  
added “I do not view either account 046 or these journal entries as being fraudulent in  
3
001  
their nature or intention to conceal”.  
2794] When saying that the auditors had not been told something, Selman took for  
[
granted that, if they had been told, they would have made a note and written something,  
3
002  
to that effect, in their audit working papers.  
and, once again, just to reiterate the code since maître Fishman wasn't here  
when I explained it, when I say that they were not told, I mean that I have not  
seen any evidence that they were told something which I would have expected  
they would have recorded in the working papers or otherwise would have  
dealt with had they...  
I am just simply saying that when I say that (inaudible) were not told, it's because  
I haven't seen any evidence that they were told in the working papers, and I do  
this where I see things that I'd believe are of such significance that they  
would have been recorded in the working papers or otherwise dealt with by  
the auditors.  
(
our emphasis)  
[
2795] Selman summarized his views on management’s representations as follows:  
In simple terms, the assumption is that management genuinely wants to present  
financial statements that are in accordance with GAAP. This is the normal  
experience. Contrary to suggestions otherwise, it is very rare that management  
wants to produce financial statements that are wrong.  
Now, we've talked a bit, and there's been a good deal of discussion in the case  
about management representations. The proper description, I think, is this. A  
representation by management is not sufficient audit evidence in itself.  
Management representations include not only the representations contained  
in the financial statements and the formal written representations, such as  
the year-end representation letter, but the assertions and explanations about  
particular transactions, or in cases like this, about carrying values of  
assets that he received from management. All of these are representations.  
2999  
3000  
3001  
3002  
Selman, May 6, 2009, pp.76 and following  
Selman, May 7, 2009, p. 23  
Selman, May 7, 2009, p. 25  
Selman, May 7, 2009, pp. 29-30  
500-05-001686-946  
PAGE: 562  
They usually require corroboration. (…)  
The representations often take the form of accounting estimates. In the  
context of this case, the most significant of these accounting estimates were  
management estimates of Castor's loan loss provisions. So, the auditor's  
objective in respect to these estimates is to obtain sufficient appropriate audit  
evidence that provide reasonable assurance that the estimates are reasonable  
within the context of the financial statements as a whole, and if we look at  
handbook section 5305.08, we see that that is the manner in which the handbook  
3003  
sets it out.  
[
2796] On the topic of scepticism, Selman summarized his views as follows:  
So, to balance off the assumption of management's good faith, the auditor is  
expected to maintain an attitude or professional scepticism and in my report, I  
referred to the Russian proverb "Trust but verify", "doveryai, no proveryai". I lifted  
it, as it were, from a speech of Ronald Reagan on arm's limitation treaties. I  
understand he lifted it in turn from Damon Runyan (ph.), but it sets out this  
balancing issue of on one hand, accepting what you're being told and on the  
other hand, verifying it to some degree.  
So, it's usually described as assessing the validity of the evidence obtained and  
being alert to evidence which contradicts the assumption of management's good  
faith. Being alert does not mean being obsessively sceptical or suspicious.3  
004  
[
2797] Selman described the attitude an auditor had to have in 1988, 1989 and 1990, as  
follows: to be alert to the possibility that fraud existed or alert to contradictory evidence,  
and he needs to increase, he needed to increase the depth of the audit work that was  
done if there was a significant indication of the existence of fraud.  
3
005  
[
[
2798] During his testimony, Selman qualified Stolzenberg as “a crook”.3006  
2799] In his cross-examination, and for purposes of his assessment of management  
fraud, Selman was asked whether he had given any consideration to the close  
relationship between Wightman and Stolzenberg. Selman confirmed he had not, all  
issues of that type being part of the independence issues that the Court was herself  
3
007  
going to address and which were outside the scope of his mandate.  
[
2800] Selman was also asked whether he had considered the possibility that the  
explanation for the various misstatements was not management misrepresentation but  
3003  
3004  
3005  
3006  
3007  
Selman, May 19, 2009, pp.23-24  
Selman, May 19, 2009, p.26  
Selman, May, 19, 2009, p.27  
See for example : Selman, May 26, 2009, p.39  
Selman, May, 26, 2009, pp.30-31, p.38  
500-05-001686-946  
PAGE: 563  
rather Wightman’s lack of objectivity in performing his audit work appropriately, and he  
said he had not.3  
008  
[
2801] During his cross-examination, Selman acknowledged that his analysis of the  
year-end meetings was limited and restricted to Wightman’s sayings and to notes  
included in the working papers.  
Have you considered the evidence from the record as to what questions, if any,  
were put by Mr. Wightman to Mr. Stolzenberg at the year-end meetings?  
3009  
A- Only to the extent that they've been described by Mr. Wightman  
extent that there are any notes in the working papers.3  
and to the  
010  
[
2802] During his cross-examination, Selman acknowledged the following: “if a  
document was never asked for, never seen and there was no representation to Coopers  
&
Lybrand as to the existence of the circumstances that the document purports to  
3011  
suggest, then it would have no consequence on the audit”.  
[
2803] During his cross-examination, Selman was asked if, to comply with GAAS, it was  
enough “to walk into an audit and say show me whatever you think I should look at, and  
if you don't show it to me, then I'm assuming that it's not important”, and he confirmed it  
was not.3  
012  
[
2804] Selman was also asked to give examples of what an auditor would ask for or  
expect to find in a loan file, and he answered as follows:  
the loan files should contain such things as evidence of the existence of the  
loan, evidence as to the value of the loan, collectibility of the loan, matters of  
that nature should... one would expect to be in the loan files.3  
013  
an appraisal if you got a loan that has collateral3014  
If you had an unsecured loan, you would be looking for such things as  
financial statements, net worth statements, history of the payment of the  
loans, which you would get from perhaps not the loan file, but the review of the  
loan card in the accounting records, credit reports if those existed, that type of  
3015  
things.  
(our emphasis)  
3
008  
009  
Selman, May 26, 2009, pp.31-32  
3
Are only included examinations that took place during the 90s since Wightman only testified before  
this Court in 2010 (after Selman)  
3010  
3011  
3012  
3013  
3014  
3015  
Selman, May 26, 2009, p.41  
Selman, May 26, 2009, p.68  
Selman, May 26, 2009, p.69  
Selman, May 26, 2009, p.70  
Selman, May 26, 2009, p.70  
Selman, May 26, 2009, p.71  
500-05-001686-946  
PAGE: 564  
The auditor would need to know more about the circumstances of the loan.  
The first question would be one of how long-standing it was. If it had been  
outstanding for a while, the auditor would probably look at the payment history  
of the loan, the auditor would look for supporting evidence as to the financial  
capacity of the borrower and the guarantor.3  
016  
Net worth statements of a guarantor, financial statements of the borrower,  
financial statements of a parent company if the parent company were the  
guarantor, generic evidence of that nature.3 (our emphasis)  
017  
Q-Assuming that the value of the loan information did not exist in the loan file?  
A- Then they should ask for further information, until they have sufficient  
3018  
persuasive evidence.  
If there's nothing in the file but the commitment letter and the promissory note,  
and the auditor doesn't ask for financial statements if we're dealing with an  
unsecured loan, then as I said I think that's a breach of GAAS.3  
019  
If the auditor asks for financial statements and he is told they don't exist,  
then the auditor would naturally, I think, ask the question "Well, if they don't  
exist, what have you used as the loan officer to satisfy yourself that this loan is  
collectible? What have you relied on? Could you show me what you're relying  
3020  
on?".  
(our emphasis)  
[
2805] In a specific described context, counsel for the Plaintiff asked Selman a question  
about the requirement of “persuasive audit evidence”. Selman did not hesitate to  
confirm that in such a context, an auditor did not have persuasive audit evidence.  
Q. - If Donald Selman is the auditor, and I'm asking your opinion, and you're  
auditing a thirty-five (35) million dollar unsecured loan, and all you have is a  
commitment letter, a promissory note and a statement from Mr. Smith that the  
loan is good or okay, or has been renewed for another year, would that constitute  
persuasive audit evidence?  
A- No.3021  
3016  
3017  
3018  
3019  
3020  
3021  
Selman, May 26, 2009, p.73  
Selman, May 26, 2009, p.73  
Selman, May 26, 2009, p.75  
Selman, May 26, 2009, p.77  
Selman, May 26, 2009, p.78  
Selman, May 26, 2009, p.76  
500-05-001686-946  
PAGE: 565  
[
2806] Immediately thereafter, the following exchange took place:  
Q.-And if an auditor would rely on that information or loan to come to a  
conclusion as to the carrying value of the loan, that would be a breach of GAAS?  
A- Assuming that that were all the circumstances, that you have a loan that's  
standing on the books, it's been there for some period of time and there's no  
more information than the existence of a commitment letter and a promissory  
note, I would want more information.  
Q- That would be a breach of GAAS?  
A- Yes.3022  
Levi  
[
2807] After considering all of the evidence as detailed in his written report, Levi writes  
3023  
under the heading “Summary of Conclusion and Opinion” of his report:  
1
. Wolfgang Stolzenberg managed to organize a group of co-conspirators to  
participate in an elaborate, complex and massive fraud.  
2
. Wolfgang Stolzenberg enlisted outside law firms in Canada and Europe, local  
accountants who had the appearance of being independent, management within  
Castor Holdings Ltd. at all levels, bankers, lenders, borrowers and others, as his  
group of co-conspirators  
3
. Wolfgang Stolzenberg and his co-conspirators carefully, systematically and  
effectively devised and executed transactions which had the effect of deceiving  
Castor Holdings Ltd.'s auditors (the "auditors"), creditors, bankers, certain  
directors and shareholders.  
4
. Wolfgang Stolzenberg and his co-conspirators utilized over 200 entities (some  
fictitious) around the world to assist in his scheme.  
5
. Wolfgang Stolzenberg and his co-conspirators backdated documents  
extensively to demonstrate the existence of transactions at times when they did  
not occur.  
6
. Wolfgang Stolzenberg and his co-conspirators created transactions which  
included bona-fide documentation, when in fact they were creating an illusion to  
deceive Castor Holdings Ltd.'s auditors, creditors, bankers, certain directors and  
shareholders.  
3
022  
023  
Selman, May 26, 2009, p.77  
D-1347, pp. 2-3  
3
500-05-001686-946  
PAGE: 566  
7
. Wolfgang Stolzenberg and his co-conspirators created and, in my opinion,  
would have created, any document requested by the auditors or required to  
justify their deception.  
8
. Considering the extent of the fraud, the elaborate and widespread  
management collusion, the outside collusion and the intentional deception and  
misrepresentations made by Wolfgang Stolzenberg and his co-conspirators to  
the auditors, it is my opinion that it was not possible for Coopers & Lybrand to  
have detected the fraud during the performance of their year end audits in  
accordance with Generally Accepted Auditing Standards for 1988-1990.3  
024  
[
2808] During trial, Levi enunciated his definition of “co-conspirators” as follows: “My  
definition is that these are people who, whether knowingly or unknowingly, wilfully or  
unwilfully, intentionally or unintentionally, participated with Mr. Stolzenberg in the  
production of documents or transactions which had the effect of concealment and  
3
025  
deception as described in my report. It's nothing more and it's nothing less”.  
[
2809] In his written report, as an integral part of the concealment process, Levi adds  
the following characteristics of the network of individuals and entities:  
a network of individuals and entities which spanned the globe (…)The true  
identity of the principals of these entities was camouflaged by having  
nominee shareholders, directors or officers, many of whom remain a mystery.  
(
…) establishing many of these entities in jurisdictions in which it is difficult  
or impossible to determine true beneficial ownership, e.g. Panama,  
Netherlands Antilles, Switzerland and Liechtenstein (…)  
distanced the audits from Castor Holdings Ltd. and his personal companies (i.e.  
Stolzenberg’s companies) by employing different audit firms - Coopers &  
Lybrand for Castor Holdings Ltd. and its subsidiaries, and KPMG for his personal  
companies and the York-Hannover Group, Rogoff and Company, P.C. for the DT  
Smith group and other unknown auditors or accountants for many of the other  
3026  
entities.  
(our emphasis)  
[
2810] Levi sustained that his report demonstrated how many of the parties to the  
Widdrington file, and to the other files upon which the present judgment will have  
binding effect, “were in fact deceived by an elaborate and complex scheme of  
misrepresentation, falsification and dishonest documentation which was orchestrated by  
Wolfgang Stolzenberg and a wide group of co-conspirators which included certain of  
Castor Holdings Ltd.'s officers, directors, shareholders, lawyers, investors, banks,  
consultants and internal accountants. In short, a scheme so well planned and executed  
that it could not have been detected using conventional investment analysis by its  
bankers, Generally Accepted Auditing Standards by its auditors or accepted financial  
3024  
3025  
3026  
D-1347, at page 19  
Levi, January 27, 2010, p. 231  
D-1347, p. 57  
500-05-001686-946  
PAGE: 567  
monitoring techniques by its investors. It could only have been detected through an  
extensive forensic investigation subsequent to its inevitable collapse, as did occur with  
Castor Holdings Ltd.”3  
027  
[
2811] In his written report, Levi describes as follows the way Castor would have  
perpetrated fraudulent activities, the techniques it would have used:  
•
•
•
•
•
Transactions with secret associated entities;  
Fictitious transactions and resulting revenue reporting issues;  
False documents;  
Backdated documents; and  
Incomplete or misleading representations to auditors, investors and  
3
028  
shareholders.  
3029  
2812] Levi asserts management fraud at Castor resulted from concealment , use of  
3030 3031  
[
the Stolzenberg’s network of entities , circular transactions , backdating of  
3
032  
3033  
documents and agreements,  
misappropriation of fees and revenues, and  
capitalization of interest.3  
034  
[
2813] Levi asserts collusion and complicity by management and third parties, including  
Ron Smith, Whiting and Mackay, various lawyers (namely lawyers from McLean &  
3
035  
.
Kerr), Prychidny, three German banks and Bank Gotthard  
[2814] In his written report, Levi opines that C&L were deceit because of:  
•
•
•
Castor’s misrepresentations concerning the overall appraisals of loans.  
Castor’s withholding knowledge of problems with the YH portfolio.  
Castor’s failure to disclose the existence of the “yellow files”  
(correspondence files).  
•
Castor’s failure to disclose the diversion of funds from the hotels.  
3027  
3028  
3029  
3030  
3031  
3032  
3033  
3034  
3035  
D-1347, p.19  
D-1347, p.46  
D-1347, chapter 9.2, pp. 55-56  
D-1347, chapter 9.3, pp. 57-58  
D-1347, chapter 9.4 pp. 58-98  
D-1347, chapter 9.5, pp.98-108  
D-1347, chapter 9.7. pp. 113 -139  
D-1347, chapter 9.6, pp. 108-113  
D-1347, chapter 11, pp. 143-183  
500-05-001686-946  
PAGE: 568  
•
Castor’s failure to fully disclose the reason for the 1988 Topven  
restructuring.  
•
•
•
•
•
Circular transactions and capitalized interests.  
Management’s instructions on dealing with auditors’ questions.  
Misrepresentations of the ownership of 97872 Canada Inc.  
Castor’s failure to disclose the ownership of TransAmerica.  
Castor’s failure to disclose a $3.6 million guarantee of Four Season’s  
mortgage.  
•
Collusion to produce false personal financial statements.3036  
[
2815] In his written report, Levi describes various transactions as “fraudulent  
transactions” because in his opinion their true nature, as disclosed in Castor’s  
accounting records, was not representative of their underlying intent, as described in  
3
037  
Castor’s internal memos providing additional insight as to their purposes . He opines  
3
038  
:
that the following “fraudulent transactions exemplify the intentional deception”  
•
•
•
•
•
•
•
The 100 million transaction of 1987 (issuance of debentures).3039  
The 1987 year-end transaction with YHDL for $8.3 million.3040  
The 1988 year-end transaction with YHDHL for $1.5 million.3041  
The 1988 year-end transaction with KVWI for $35 million.3042  
The 1988 year-end transaction with YHDL for $ 20 million.3043  
The 1988 year-end transaction relating to TWTC for $10 million.3044  
An October 1988 transaction relating to Airport Corporate Center and CHR  
3
045  
Equities for $24 million.  
3
036  
037  
D-1347, chapter 12, pp. 183-203  
what was seen in the accounting records on the surface is not the full story behind the entire  
3
“
transaction.” Levi, January 27, 2010, p.121  
3038  
3039  
3040  
3041  
3042  
3043  
3044  
D-1347, p. 58  
D-1347, p. 58 and pp. 60 to 66  
D-1347, p. 58 and pp.67-68  
D-1347, p.58 and p. 69  
D-1347, p. 58 and pp. 70-71; Levi January 27, 2010, pp.120-123  
D-1347, p. 58 and p. 72  
D-1347, p. 58 and pp. 73-76  
500-05-001686-946  
PAGE: 569  
•
•
The 1989 year-end transaction with YHDL for $13.2 million.3046  
The 1990 year-end transaction for $40 million (known in this file as “the nasty  
nine”).3  
047  
•
The 1991 transactions relating to the “Nasty nine transaction of 1990”.3048  
[
2816] All those transactions are recorded into Castor’s accounting books and records,  
a fact Levi acknowledges: all inscriptions were there for the auditors to see. There was  
no concealment of figures, but Levi says the true substance of the transactions was  
3
049  
nowhere to be found in those books and records.  
[
2817] To piece together this “well-conceived, executed and concealed fraud, and to  
understand exactly how widespread the network of related and associated entities, co-  
conspirators and fraudulent activity extended, Levi accentuated the fact that it had  
taken:  
•
•
Many years of investigative work performed subsequent to the failure of Castor.  
Many thousands of hours devoted by highly trained auditors in the field of  
forensic and investigative auditing.  
•
An army of lawyers performing examinations and discoveries of individuals,  
3
050  
companies and documents.  
[
2818] Levi opines that “No auditor conducting an audit in accordance with Generally  
Accepted Auditing Standards could be expected to have detected such a well-  
3
051  
conceived, executed and concealed fraud .”  
[
2819] Levi opines that :  
•
had the auditor asked for any more audit evidence, Stolzenberg and his “co-  
conspirators” would have created the requested documentation and  
presented all of the requested transaction evidence to the auditors'  
satisfaction; and  
•
Had the auditors questioned any transactions, Stolzenberg and his “co-  
conspirators” would have provided explanations which would have been  
carefully designed to satisfy the inquiries and would have been corroborated  
3045  
3046  
3047  
3048  
3049  
3050  
3051  
D-1347, p.58 and pp. 77-82  
D-1347, p. 58 and pp. 83-84  
D-1347, p. 58 and pp. 85- 95  
D-1347, p. 58 and pp.96-97  
Levi, January 27, 2010, pp. 122-123  
D-1347, p. 28  
D-1347, p. 28  
500-05-001686-946  
PAGE: 570  
by other members of management, examination of documents prepared for  
the purpose of satisfying the auditors or by confirmation from entities involved  
3
052  
in the transactions.  
[
2820] Based on his experience in dealing with fraud, and his assessment of the  
evidence he had reviewed, Levi states that it would be reasonable to infer that the  
individuals identified in his report as “co-conspirators” would not have provided C&L with  
the information now available to the Court had C&L asked them questions during their  
audits in 1988, 1989 and 1990.  
[
2821] As a matter of fact, Levi takes for granted that “evidence shows that Wolfgang  
Stolzenberg and his co-conspirators would have produced and did produce whatever  
documentation was required to satisfy the auditors in connection with concealing the  
3
053  
This premise explains largely his disagreements with  
fraudulent activities at Castor”.  
Plaintiff’s experts.  
[
2822] Levi writes:  
For the most part, frauds occur when circumstances arise which result in  
basically honest people becoming desperate and doing desperate acts in an  
attempt to correct or prevent the negative impact of these undesirable  
circumstances. With the benefit of hindsight and with what we now know about  
the activities at Castor Holdings Ltd., its story follows this classic pattern.3054  
(
our emphasis)  
[
2823] Levi explains that there is a difference between a forensic audit and a GAAS  
audit. There are three levels of auditing mentioned in section 5300 of the Handbook,  
3
055  
and relating to error and fraud:  
•
•
Level 1 which includes sections 5300.01 to 5300.41 where the auditor applies  
regular auditing procedures and relies on the good faith of management and the  
completeness of the records.  
Level 2, which includes sections 5300.42 to 5300. 59, where the auditor applies  
forensic procedures after he or she has encountered circumstances that cause  
him or her to suspect that fraud or error has occurred and where he or she has to  
support or dispel such suspicion.  
•
Level 3, when the auditor encounters or suspects fraud that may involve  
management and where the auditor has to reconsider his assumption of  
management’s good faith.  
3052  
3053  
3054  
3055  
D-1347, p. 31  
D-1347, p.214  
D-1347, p. 45  
Levi, January 13, 2010, pp.85 and following ; D-1347-2  
500-05-001686-946  
PAGE: 571  
At Level 1, the auditor stands at an ordinary GAAS audit level, but when he has to  
move to level 2 and level 3, pursuant to suspicions circumstances he has  
encountered, the forensic audit starts and the auditor’s work goes well beyond what  
is normally expected in a GAAS audit.  
[
2824] Levi opined that looking at the signatures on confirmations is a forensic audit  
3056  
procedure, not a regular GAAS procedure . The same applies, said Levi, to the  
3
057  
.
“
Probing to the bottom” procedures of Plaintiff’s experts  
[
2825] GAAS are not designed or intended to detect fraud, but through applying GAAS  
an auditor may detect fraud. Where an auditor does detect fraud, said Levi, it is  
generally because he has encountered circumstances that have made him move from  
one level of audit to the next. 3  
058  
[
2826] On his examination of the working paper files prepared by C&L for the Castor  
audits of 1988, 1989 and 1990, an examination he did before he finalized his written  
report and appeared before the Court, Levi concludes (in his written report) there were  
no failures in C&L’s application of GAAS which could have resulted in C&L’s failure to  
3
059  
He finds nothing in the files,  
detect the fraudulent activities which occurred at Castor.  
no circumstances, indicating that C&L should have raised concerns about the good faith  
of management, which would have requested them to move from Level 1 to Level 2 or  
Level 33  
060  
.
[
2827] A section of the Handbook on professional scepticism came into force in 1991,  
3061  
further to the recommendations of the MacDonald commission . This section is not  
applicable to the 1988, 1989 and 1990 Castor audits. One objective of the section that  
discusses professional scepticism (introduced in the Handbook in 1991) was to create a  
3
062  
greater awareness that fraud exists . However, and as Levi said, even before it came  
into force “Good faith in management never meant blind acceptance of everything the  
3
063  
client said”.  
[
2828] Like Selman and Goodman, Levi mentioned that there was nothing improper  
about Castor’s practice of capitalizing interest at first glance. However, he opined that it  
became a fraud when Castor used the practice to create a false picture that interest was  
being received in cash.  
3056  
3057  
3058  
3059  
3060  
3061  
3062  
3063  
Levi, January 13, 2010, p.125  
Levi, January 13, 2010, p.126  
Levi, January 13, 2010, p. 125  
D-1347, pp. 31 and 251  
D-1347, page 31  
Levi, January 13, 2010, p.132  
Levi, January 13, 2010, p. 148  
Levi, January, 13, 2010, p.147-148  
500-05-001686-946  
PAGE: 572  
[
2829] Levi acknowledged that if the journal entries for a transaction were in the  
company’s books for the auditors to see, «there was no apparent deceit» on the  
auditors.3  
064  
[
2830] Levi acknowledged that a management representation letter is not considered a  
3065  
substitute for audit evidence – he wrote it in his written report.  
[
2831] Levi confirmed that there could be situations where an auditor would not have  
detected a fraud pursuant to his own fault because he or she had not performed the  
required audit procedures.  
Q.- But I'd like to back you up, if I may, because I'm sure you would concede to  
the Court that, hypothetically, there could be a fraudulent situation where the  
auditors are still liable because they didn't do their work.  
A- I would go beyond hypothetically, I think that it has in fact occurred. So...  
Q- So now...  
A- ... that's not a hypothesis, that's reality. I think there are situations where a  
fraud occurs by a client and the auditors did not detect it because the auditors did  
not perform the procedures that they should have.3  
066  
[
2832] Levi confirmed he had to accept there were non-performing loans in Castor’s  
portfolio in 1988, 1989 and 1990 as one of the premises of his analysis of the situation  
and of his conclusions. He explained it as follows:  
I would imagine Mr. MacKay has concluded that because it was his intent to try  
and project that image to the auditors. (…)  
If he thought they were performing, he wouldn't have to try and project that  
image, it was there to be seen. So I have to accept that as one of the facts that  
existed. (…)  
I can't say when it occurred, I think it may have been a progression through those  
three years and I'm not certain that they were necessarily as nonperforming as  
Mr. MacKay may have suspected, but what you have is a situation where they  
wanted to deflect any attention from these loans by the auditors, so they created  
this illusion that everything was going fine.3  
067  
3064  
3065  
3066  
3067  
D-1347, p. 110 re $30M circular transaction in December 1988  
D-1347, p. 43  
Levi, January 27, 2010, p. 131  
Levi, January 27, 2010, pp.216-217  
500-05-001686-946 PAGE: 573  
[2833] During his cross-examination at trial, Levi also confirmed the following:  
•
•
For the preparation of his report and during his testimony before the Court, he  
assumed and considered that C&L’s audit staff had met with the GAAS  
standard for adequate technical training and proficiency, and that they had  
been properly supervised on the field during Castor’s audits of 1988, 1989  
and 1990.3  
068  
The expression “doubtful account” used by an auditor might have a different  
meaning at different stages of an audit, but at the end of the audit the  
expression means “an account on which it has been determined that a  
provision should be recorded, in part or in whole, for the possible  
3
069  
uncollectibility of that account.”  
•
•
There are various facts relating to Wightman’s involvement in companies or  
transactions, earlier looked at under the subheading “independence” of the  
3
070  
present judgment, that Levi was not aware of.  
During the relevant years, 1988, 1989 and 1990, before issuing an audit  
report, an auditor had to do everything necessary to be reasonably satisfied  
that the financial statements he was opining on were not materially in error for  
3
071  
any reason, including possible management fraud.  
•
He had looked at C&L’s audit working papers of 1988, 1989 and 1990 as long  
as they were related to the transactions he was opining on in his written  
3
072  
but he had not looked at all the audit work performed  
report (D-1347),  
during those audits by C&L.  
3
073  
•
•
C&L should have sent confirmation requests in relation to the $100 million  
3074  
debentures, but they did not.  
Account 046 was substantially reduced at year-end through journal entries  
and a competent auditor would know that the borrower YHDL was not  
repaying accrued interests he owed in cash, but rather through non-cash  
3
075  
transactions, namely new loans created.  
3
3
3
068  
069  
070  
Levi, February 1, 2010, p. 90  
Levi, February 1, 2010, pp.139-140  
Levi, February 1, 2010. pp.237 and following, Levi February 2, 2010, pp. 6 and following and exhibit  
PW-3095  
3071  
3072  
3073  
3074  
3075  
Levi, January 28, 2010, p. 37  
Levi, January 27, 2010, p.132-133  
Levi, January 27, 2010, p. 133  
Levi, January 27, 2010, p. 134-135  
Levi, January 27, 2010, pp. 140-142, p. 146; PW-84  
500-05-001686-946  
PAGE: 574  
•
Seeing that a borrower was not paying the interests on a loan which were  
accruing while the loan covenant was calling for monthly interest payments, a  
competent auditor would have noted the fact, asked questions as to why this  
was happening and insisted on getting an answer.3076  
The question would be: Why are you not collecting the interest? I  
see in the agreement, it says "interest to be paid", why is it not  
being received in cash?3  
077  
I don't think that would be the end of the discussion. It's not the  
end of the audit and I don't think it would be the end of the  
discussion, I would need more than "It's good, don't worry".3078  
3
079  
“The capitalization of  
•
•
Account 46 was not transformed fraudulently.  
interest and the journal entries used in account 46 were not only readily  
3
080  
available to the auditor, they were scrutinized by the auditor”.  
The following facts were clear from Castor’s accounting books and records of  
1
988: accrued interests accumulated during the year into account 046 of  
YHDL, those interests were capitalised into a new loan of $35 million to  
3
081  
3082  
As Levi said, “That's black and white” That $35 million loan  
KVWIL.  
was reduced by $20 million through a new loan relating to Hazelton  
Lanes.3  
083  
•
•
Looking at exhibit PW-107, an auditor should have had a lot of questions to  
ask relating to accrued interest, monthly interest payments and year-end  
interest payments.3  
084  
Seeing exhibits PW-167 P and PW-167 Q (that were brought to his attention),  
Levi acknowledged he could no longer defend what he had written on page  
2
02 of his report relating to an alleged failure of Castor to disclose to C&L a  
$
3.6 million guarantee of Four Season’s mortgage. Levi admitted that the  
3
085  
information was there for the auditor to see.  
•
Levi was not aware that Castor had many loans concerning development  
properties where interest capitalization was foreseen right in the loan  
3
3
3
3
3
3
3
3
3
3
076  
Levi, January 27, 2010, pp. 156-157 , pp. 205-206, pp. 207-211  
Levi, January 27, 2010, p. 206  
077  
078  
079  
080  
081  
082  
083  
084  
085  
Levi, January 27, 2010, p. 211  
Levi, January 27, 2010, pp. 161-162  
Levi, January 27, 2010, pp. 192-193, pp. 201  
Levi, January 27, 2010, pp. 172-173, 194-195  
Levi, January 27, 2010, p. 172  
Levi, January 27, 2010, pp.173-174, 177; PW-107  
Levi, January 27, 2010, pp.179-188  
Levi, January 28, 2010, pp. 51- 65 : D-1347, p. 202  
500-05-001686-946  
PAGE: 575  
agreement. Acknowledging that fact, Levi added “I did not review the loan  
3
086  
In fact, to prepare his report Levi looked at transactions, but  
agreements”.  
he did not look at loans.  
3
087  
I don't believe I looked at any loans in my report, I looked at  
transactions which created a loan but I didn't look at the loan. For  
example, the transactions we've been talking about, I have not  
looked at the thirty-five (35) million dollar loan, I've looked at the  
journal entries, and the memorandum and documentation  
surrounding that which created the loan, but I did not look at the  
valuation of the loan or anything else after that.3  
088  
[
2834] Levi admitted: “I have not looked at or given any opinions, nor do I feel capable  
of giving you opinions on the valuation of that loan. I have not looked at the audit  
3
089  
“I have not dealt with those two  
procedures that were done to value the loans”,  
aspects, the loan valuation or the loan loss provision”.  
3
090  
[
2835] Levi gave the following example of what an auditor’s review of a new loan could  
be:  
Someone who is looking at the loans is doing an analysis of the loans, goes in  
and sees we have a new loan of five (5) million dollars, and then wants to  
determine, okay, if we have a new loan of five (5) million dollars, is that because  
we issued a cheque for five (5) million dollars, they would then go to the cash  
disbursements journal to determine, have we disbursed the five (5) million  
dollars to create the loan.  
If they went and did that, they said "No, we didn't", then, they'd say, "Okay, how  
did that loan originate?", they would go into account 65 and they would see the  
origin of that is account 46, that would then take them to the journal that we're  
at.  
So it's a reverse audit procedure, it's not looking at the general journal, because  
the purpose of looking at the general journal would be to determine that entries  
had been properly approved, that they'd been properly recorded, that, for  
example, if this instruction was "Record this entry to account 68", but by mistake  
they recorded it to account 65, that's the kind of an audit of the general journal,  
which is a separate audit, a completely separate audit procedure.  
3086  
3087  
3088  
3089  
3090  
Levi, January 27, 2010, p. 207  
Levi, January 27, 2010, p. 212  
Levi, January 27, 2010, p. 212  
Levi, January 27, 2010, p. 212  
Levi, January 27, 2010, p. 216. See also Levi, February 1, 2010, p. 79  
500-05-001686-946  
PAGE: 576  
So under the example I gave you where they are doing the loan audit and they  
are tracing it all the way back in that context, this would bring them to the  
entries that we're looking at.3 (our emphasis)  
091  
[
2836] Pressed to explain how and why he was qualifying “as fraudulent” the $35 million  
loan transaction of 1988 with KVWIL, Levi answered: “It was because Mr. MacKay says  
that his memo was intended to conceal information from the auditor and project to the  
auditor a situation where loans were performing and interest was being realized by  
Castor and capitalized, and new loans were being created, and as well he points out the  
ability of Castor to raise new money. All of this goes to the credibility of the income  
3
092  
being recorded on those loans.”  
[
2837] Levi was asked to explain the reaction an auditor should have at seeing payment  
of interests, apparently in cash, from YH debtors in 1990, after having faced  
capitalization of interests on new loans through journal entries for the same debtors in  
1
988 and 1989. He answered as follows:  
They may ask the question "Why all of a sudden has a company that wasn't  
paying, now are they paying?", that's very possible. Any audit procedure and  
any finding could generate questions. I think any significant change would  
generate questions. The question then is based on the answer received, is it  
plausible, does the auditor accept the explanation, considering that they're still  
at the stage of relying on the good faith of management, can we accept their  
explanation or do we find their explanation to be a little bit too outside the realm  
3093  
of plausibility, such that we have to start checking a little bit more?  
emphasis)  
(our  
[2838] During his cross-examination, Levi clarified his mandate as follows:  
Q- Does that cause you a problem?  
A- What kind of a problem?  
Q- In assessing the audit work that the auditors did?  
A- I'm hesitating because I'm not sure how to answer that. I looked at the work  
that was done by the auditors, I didn't assess, and again I go back to what my  
objective and my mandate was, it was not to assess the work of the auditor  
but to assess whether the availability of the information that was withheld  
3091  
3092  
3093  
Levi, January 27, 2010, pp.148-149  
Levi, January 27, 2010, p. 194  
Levi, January 28, 2010, p.239-240  
500-05-001686-946  
PAGE: 577  
would have or could have impacted on their ability to do their work.3 (our  
094  
emphasis)  
[
2839] Levi reiterated:  
•
that his role as an expert had been “to look for indicia of fraud which may  
have impacted on the auditors' ability to perform their audit”;  
•
but that it was not “to do a determination of whether or not loans were in  
default, or whether there was a valuation issue, or whether there was a loan  
loss provision issue. Those were in the domain of other experts, it's  
completely outside of my expertise. Had I been asked to do that mandate, I  
would have refused because I'm not going to take on something that I don't  
3
095  
myself feel competent to do. ”  
[
2840] To enlighten the Court as to the proper context of Levi’s opinions, Levi was  
asked what his understanding of the professional liability of the auditor would be if the  
Court was to reach the following findings:  
•
•
The auditor did not exercise due care and diligence.  
Had the auditors exercised due care and diligence, they would have been  
able to uncover things that would have led them not to issue audited financial  
statements at all or not to issue them as they were issued.  
[2841] Levi’s answer was:  
Based on the assumptions just enunciated, and adding the assumption that  
the audit failures, whether it be in the planning stage or the supervision of staff or  
the execution of the audit, if those generally accepted auditing standard  
procedures were not followed and there was failure there which resulted in the  
financial statements being misstated and had the auditor done the proper  
procedures under GAAS, those GAAS procedures would have provided the  
auditor with some form of indication that there is the need to pursue transactions  
further which then could have resulted in detection of the fraud, because I'll state  
that I don't believe the standard auditing procedures, the level 1 procedures  
would detect the fraud, but if they had done what they should have done and  
level 1 would have brought them to level 2 suspecting an irregularity which  
required further work, and then maybe to level 3 even, then yes, they would  
have been at fault for not doing level 1 properly, which would have then led  
them to levels 2 and 3. That would be my understanding.3 (our emphasis)  
096  
3094  
3095  
3096  
Levi January 27, 2010, pp.129-130  
Levi, January 27, 2010, p. 218-219  
Levi, January 28, 2010, pp. 11-12  
500-05-001686-946  
PAGE: 578  
[
2842] Levi said he would be surprised, and would find it hard to understand, that none  
of the Defendants‘experts had been called upon to provide a specific opinion as to  
whether the work performed by C&L to value the loans in the Castor portfolio was  
conducted in accordance with GAAS, given his limited mandate and his understanding  
of the issues in litigation, which included clearly the methodology of valuing the loans  
and auditing the loans. 3  
097  
[
2843] As the following exchange between counsel for the Plaintiff and Levi illustrates,  
Levi’s mandate was confined to one topic, i.e. the identification of indicia of fraud,  
whether or not they could have or effectively had an impact on the audit process:  
Q. - My last question before the break, I'm going to suggest to you that your  
methodology is flawed, and you can certainly tell me that you don't agree, you're  
saying that you looked for indicia of fraud which would have made it difficult for  
the auditors to ascertain the true nature of the transactions. Wouldn't it have  
been appropriate to first determine that the auditors performed the procedures  
that they were supposed to perform, and then explain to the Court that they didn't  
get the right answer because of fraud? Why have you started with fraud and not  
with the audit work?  
A- I've tried to, I think, explain this when I looked at the... when I spoke with the  
methodology, and I think I referred to the decision 3, and the question was: Are  
the financial statements misstated, yes or no? Are they in accordance with  
GAAP, yes or no? If they're deemed not to be in accordance with GAAP, then  
why are they not in accordance with GAAP? Were there audit failures that  
resulted in them not being in accordance with GAAP?  
If it's deemed that there were audit failures not to be in accordance with GAAP,  
then the question is: Were those audit failures as a result of the auditors being  
deceived or as a result of them being negligent, or making mistakes? And if it  
was determined it's because they were deceived, how were they deceived?  
My understanding is there are other experts who addressed the issues of  
whether or not the financial statements are or are not in accordance with GAAP  
and that aspect of it.  
My mandate was, are there any indicia of fraud, and I don't believe that we  
have seen all the indicia of fraud and I'd believe there are certain transactions,  
which I might refer to in the context of my report, which don't even impact  
on Castor or on the auditors but are there to provide the Court with my view of  
the atmosphere that existed during these years that the auditors were performing  
their audit, an atmosphere of deception and concealment, hiding of documents,  
3097  
Levi, February 1, 2010, p.40  
500-05-001686-946  
PAGE: 579  
not volunteering information that the people knew the auditors would or should  
have to help make them make proper decisions.  
Did that impact on whatever faults the Court may find ultimately translated into  
GAAP failures on the statements? I don't know what the Court will decide is a  
GAAP failure, but the Court will then have my testimony and my report as to what  
were the fraudulent transactions that... and the deception that I've identified that  
precluded the auditors from identifying or carrying out their work, what precluded  
them from identifying related party transactions, what precluded them from  
identifying the cash circles as being a deceptive mechanism to imply that loans  
were being... were performing?  
I don't see... I started at the fraud end, you don't start at the GAAP end  
because if, for argument sake, there was nothing wrong with the financial  
statements, as I pointed out, in some instances, a transaction had no impact  
on the financial statements because it was all within the same line on the  
balance sheet. That doesn't mean that there wasn't some fraud that  
occurred. So you don't necessarily have a GAAP failure which is as a result of  
fraud, and every fraudulent transaction doesn't necessarily produce a GAAP  
failure. (our emphasis)  
[
2844] During his cross-examination, Levi recognised that he was not providing the  
Court with any opinion on the following topics for any of the three relevant years, 1988,  
1
989 and 1990: 3  
098  
•
Whether Castor's loans were carried at the lower of cost and estimated realizable  
value.  
•
•
Whether any additional loan loss provisions were required under GAAP.  
Whether C&L obtained sufficient appropriate audit evidence to support their  
conclusion on the carrying value of the Castor loans.  
•
Whether C&L properly documented, in accordance with GAAS, the audit  
evidence that they relied upon in respect of the carrying value of the Castor  
loans.  
•
•
•
Whether any of the revenue recognized by Castor should not have been  
recorded as revenue in accordance with GAAP.  
Whether there was reasonable assurance of collectability of the revenue  
recognized by Castor.  
Whether notes 2, 3 and 4 to the audited consolidated financial statements were  
designed to convey the liquidity of Castor to readers.  
3098  
Levi, February 2, 2010, pp.84- 99  
500-05-001686-946  
PAGE: 580  
•
•
•
•
Whether economic dependence existed between Castor and any of the lenders  
or borrowers described in his report.  
Whether the Canadian York-Hannover group of companies was insolvent in  
1988, 1989 or 1990.  
Whether the use by Castor of a Statement of Changes in Net Invested Assets  
was in accordance with Section 1540 of the CICA Handbook.  
Whether the audited consolidated Statement of Changes in Net Invested Assets  
disclosed the amount of cash used up in or provided by operations in accordance  
with GAAP.  
•
•
Whether there were indicia of fraud in respect of the preparation of the valuation  
letters.  
Whether there were indicia of fraud in respect of the preparation of the Legal-for-  
Life Certificates by C&L.  
[
2845] Levi’s analysis of certain transactions was incomplete, to say the least. The  
following exchange, relating to his alleged failure of Castor to disclose a $3.6 million  
3
099  
guarantee of Four Season’s mortgage,  
illustrates, in the context of the  
characteristics and the limits of his mandate, the weaknesses or the flaws of the  
methodology he followed.  
Q.- I'd like to look at with you D-1313. Perhaps we can just pull it out. D-1313,  
and I don't know if you need me to give it to you, it's the Standard Practices for  
Investigative and Forensic Accounting Engagements. (…)  
Point .05 states, under the heading "General": "IFA practitioners should identify,  
analyze, assess and compare all relevant information, assess substance over  
form, and develop and test as needed hypotheses for the purpose of evaluating  
the issues in the IFA engagement."  
Q.- Would it be fair to say that in respect of the three point six (3.6) million dollar  
guarantee issued, you did not identify, analyze, assess and compare all relevant  
information before you wrote your report?  
A- Yes.  
Q- And would you agree that you did not test alternative hypotheses, such as the  
hypothesis to the effect that the information about the existence of the three point  
six (3.6) million dollar guarantee was not hidden from the auditors?  
A- Clearly.  
3099  
D-1347, chapter 12, section 12.11, p. 202  
500-05-001686-946  
PAGE: 581  
Q- Did you consider, when you were writing this section, the possibility that the  
auditors actually knew about the three point six (3.6) million dollar guarantee?  
A- No. I think if that existed, I would have seen reference to it in the eighty-eight  
(
'88), eightynine ('89) and ninety ('90) working paper files. Now, I'll qualify that by  
saying I did not look at working paper files going back to nineteen eightyfive  
(
1985), as mentioned before. My understanding was that we were focusing on  
these three (3) years. If there was some mention in the prior working paper file,  
or if there is, for argument sake, mention in the analysis of the fee income that  
there's a small amount of commission income with regards to this three point six  
(
3.6) million dollars, that is something that would have gone unnoticed.  
Q.-But if a guarantee is assumed in nineteen eightyfive (1985), wouldn't the  
logical place to go be to the nineteen eighty-five (1985) working papers to assess  
whether the auditors knew about the guarantee?  
A- I think, from the auditor's perspective, yes, absolutely. 3100  
Plaintiff’s experts  
Vance  
[
[
2846] Vance referred to the Handbook definition of fraud, section 5300.43.  
2847] Vance explained that the auditor’s objective with respect to material  
misstatements caused by fraud and error was set out in section 5300.44, as follows:  
The auditor’s objective in making an examination of financial statements in  
accordance with generally accepted auditing standards is to express an opinion  
on the fairness with which they present the financial position, results of  
operations and changes in financial position in accordance with generally  
accepted accounting principles. The auditor recognizes that the financial  
statements may be misstated as a result of fraud or error. Accordingly, in  
obtaining sufficient appropriate audit evidence to afford a reasonable basis to  
support the content of his report, the auditor seeks reasonable assurance,  
through the application of procedures that comply with generally accepted  
auditing standards, that fraud and error which may be material to the financial  
statements have not occurred or that, if they have occurred, they are either  
corrected or properly accounted for in the financial statements. The auditor has  
no separate or additional responsibility to detect fraud or error. The prevention  
3101  
and detection of fraud and error is primarily a management responsibility.  
[
2848] Vance opined that in 1988, 1989 and 1990, an auditor had to design its audits (to  
plan its audits) to detect all types of misstatements, whether they were resulting from  
3
100  
101  
Levi, January 28, 2010, pp.65-69  
3
PW-1419-1A (1988); PW-1419-2A (1989); PW-1419-3A (1990)  
500-05-001686-946  
PAGE: 582  
fraud or error. 3 He cited the C&L technical material TPS-A-300 , at paragraph 10  
on page 10 and under the heading “audit Risk”, where in his opinion C&L was  
acknowledging such an obligation to plan an audit to detect all material misstatements  
102  
3103  
(
resulting from fraud and error).  
The term “overall audit risk” is used to describe the risk that an inappropriate  
audit opinion will be issued on a set of financial statements. For example, there  
is a risk that an unqualified opinion will be issued when the financial  
statements taken as a whole contain a material misstatement resulting  
from either fraud or error. We are not obligated to plan the audit to detect  
3104  
immaterial misstatements resulting from fraud and error.”  
(Emphasis by  
Vance)  
[
2849] Vance acknowledged that an auditor did not have the responsibility to detect  
fraud in the relevant period (1988, 1989 and 1990). Then, the responsibility of the  
auditor was limited to an obligation to plan to detect material misstatements.  
No. As set out in section 5300.44, the auditor has no specific responsibility for  
the detection of fraud, that is solely a management responsibility in those years,  
nineteen eighty-eight (1988) to ninety ('90), an auditor's concern is only with  
respect to detecting material misstatements in the financial statements that may  
have been as a result of fraud.3  
105  
3106  
2850] While he agreed that the auditor’s approach was not the one of a detective,  
3107  
[
Vance opined the auditor, nevertheless, ought to exercise healthy scepticism.  
[
2851] In the presence of “red flags”, of suspicious circumstances, Vance opined an  
3
108  
3
auditor should have “probe to the bottom”.  
Again, he invited the Court to rely on the  
109  
well-known and recognized author Anderson:  
SUSPICIOUS CIRCUMSTANCES  
In determining standards of care appropriate in different circumstances the courts  
have placed special emphasis on the auditor’s responsibility to detect fraud in the  
event that they become aware of suspicious circumstances. English cases have  
been very specific on this point. The Kingston Cotton Mill decision warned:  
If there is anything calculated to excite suspicion he should probe it to  
the bottom.  
3102  
3103  
3104  
3105  
3106  
3107  
3108  
3109  
Vance, March 5, 2008. pp. 128 and following  
PW-1420, tab 9  
PW-2908, vol.1, chapter 2, pages 2-1 and 2-2;  
Vance, March 5, 2008, p. 133  
Vance, May 12, 2008, p. 86  
Vance, March 5, 2008, pp. 140, and 146 and following  
Vance, March 5, 2008, pp. 136 and following  
Vance, March 5, 2008, p. 134  
500-05-001686-946  
PAGE: 583  
Recent court decisions have reaffirmed the requirement that auditors probe  
3
110  
deeply into areas that arouse suspicion. In the Continental Vending case  
in  
the U.S. in 1969 one implication of the decision was that, if auditors did not  
conduct their examination with extraordinary care and diligence in circumstances  
where there was clear suspicion of a fraud on the part of management, they  
could be held to be abetting the fraud and accordingly accomplices.  
The doctrine of probing suspicious circumstances to the utmost has been carried  
over into non-audit situations. In the 1136 Tenants case the finding of negligence  
in failing to detect the agent’s fraud was partially supported by the argument that  
the working papers contained notations of missing invoices that the CPA had not  
followed up.  
The judgment in the 1970 Pacific Acceptance case, stressing the importance of  
alertness for a pattern of suspicious circumstances, contains a contemporary  
statement on this question:  
If, during an audit, there are a substantial number of irregular or unusual  
matters encountered by audit clerks and some, singly or in combination,  
indicate the real possibility that something is wrong, then to separate  
each off into watertight compartments and pose the question  
whether it individually raises a suspicion of fraud and on receiving a  
negative reply asserting that it follows that the clerk does his duty if  
he does nothing further …denies both the true tests of legal duty of  
care and of common sense…  
Thus, if material irregularities appear, a careful auditor can normally be  
expected to remember and bring into consideration other irregularities,…  
and he might be expected to go back over past working papers, even  
those of a prior audit clerk, to bring to mind similar irregularities but  
whether he should take any of these steps would depend on the  
circumstances, particularly the seriousness and materiality of the  
irregularities uncovered.  
It is very important that auditors thoroughly document and review their work in  
order to meet the legal responsibility for the recognition of suspicious  
circumstances. In most of the court cases dealing with negligence in recognition  
of suspicious circumstances, the auditor’s working papers themselves contained  
indications that things were not as they should be. The greater danger seems to  
be not the failure to discover and document clues but the failure to recognize  
them as suspicious. A healthy skepticism should remain an important audit  
3111  
ingredient.”  
(Emphasis by Vance)  
[
2852] Vance cited one of C&L’s internal publications that confirmed that C&L agreed  
that professional scepticism was and had always been an essential part of GAAS.  
3
110  
111  
Extracts of this case were reproduced in C&L’s AWPs (PW-1053-63C-1, sequential pages 64-71)  
PW-1421-23; PW-2908, vol. 1 chapter 2, pp. 2-2 and 2-3  
3
500-05-001686-946  
PAGE: 584  
Competent and sufficient audit evidence continues to be the foundation for the  
auditor’s opinion. Insufficient professional skepticism, illustrated by  
auditing by conversation”, or failing to obtain solid evidence to back up  
“
management’s representations, can lead to audit problems. In the final  
analysis, auditors need to step back and ask one of auditing’s most fundamental  
questions: Does it make sense?”3  
112  
[
2853] Vance identified various situations (“red flags”) that should have been considered  
by C&L as suspicious circumstances and where they should have probed to the bottom,  
but did not. Vance identified various situations where, in his opinion, C&L had not  
3
113  
exercised healthy scepticism and should have.  
I think there are areas calling for healthy scepticism, as we like to call it, the first  
being in nineteen ninety (1990), working paper E-65C, which has been filed as  
PW 1053-15-10. (…)  
That's a very serious note for an audit staff member to make, and considering  
that Mr. Quesnel was not yet a CA, that is about all that a staff member at that  
level can do, is to raise the concern for the more senior members of the  
engagement team.  
(
…)  
What transpired again, as I mentioned earlier, was with these loans, there's no  
further documentation in the audit file as to the disposition of these comments,  
either with respect to the impact of such a high level of unsecured loans or with  
respect to the forty (40) million dollars of year-end loans, and the examinations  
on discovery of Mr. Wightman indicate that he went in and discussed them with  
management, but he has prepared meeting notes for his discussions on  
February fifteenth (15th), nineteen ninety-one (1991), fairly copious notes, I might  
add, but there's not a mention in those copious notes of the forty (40) million  
dollars and nothing else was done.  
The indication that the client was okay with them or pleased with them is not  
audit evidence at all, and this matter was just let dropped at that point. And that's  
exactly what tips and tidbits 163 is talking about.  
Other areas where healthy scepticism, I think, should have been brought to  
bear, there was a high level of activity and especially as the foreign portfolio  
grew, to where it exceeded that of the portfolio of Montreal, with entities  
(
inaudible) jurisdictions and for which no financial information was being  
received from the borrowers.  
In addition, the same issue with respect to scepticism, there were, surprisingly in  
my view, a high number of confirmations signed for borrowers or lenders by  
3
112  
113  
PW-1420, tab 30: T&T 163 issued January 1991; PW-2908, vol 1. Chapter 2, p. 2-4; Vance, March 5,  
2
008, pp. 140 and following  
3
For example, Vance, March 5, 2008, pp. 147 and following  
500-05-001686-946  
PAGE: 585  
Marco Gambazzi, who was a director of Castor and managing director of CH  
International Finance NV, and Mr. Baenziger, who was management, he  
managed the operations overseas and also was a managing director of CH  
International Netherlands BV and a director of CH Ireland, and this is also taking  
into account and with the extract from Anderson about being able to remember  
things, in an earlier year, they had questioned Marco Gambazzi in trust with  
respect to deposit, and he sent a telex back indicating that that deposit was being  
held in trust for Wolfgang Stolzenberg, the president of Castor.  
That's information that an auditor should have and now, you see a proliferation  
of Marco Gambazzi in trust accounts, and obviously, scepticism should lead  
an auditor to at least try to obtain more detail.  
Another situation where I believe scepticism most certainly should have been  
applied is situations where the auditors, Coopers & Lybrand, would be provided  
with audited financial statements of borrowers. In the prior years, Topven  
Holdings, with respect to the Toronto Skyline, would provide audited financial  
statements. Maple Leaf Village had audited financial statements. And they were  
in Coopers' file, as did York-Hanover Developments Ltd. Over the period from  
nineteen eighty-six (1986) to about nineteen eighty-eight (1988), they slowly fell  
off the table and were no longer provided with audited financial statements, much  
less did they... The only financial statements they did get was Maple Leaf Village  
Investments Inc., an internal financial statements, but there were no statements  
of any form examined by Coopers for Topven or York-Hanover Development  
Ltd. And that's another case of doing a little probing, to find out why, and it's not  
uncommon for auditors to ask the client "How come it's not audited?",  
(
inaudible) going from audited to unaudited, and it's, you know, a very serious  
warning sign.  
And you can also... This is something you have to be careful with ethically, but  
you can speak to the auditors of the other firm to find out. We've had that  
1
situation ourselves, and all we will say is we're no longer auditors of that  
company, and of course, the auditor who was looking for those financial  
statements is then put on notice that something has gone haywire. But you can't  
divulge client information, but you can certainly say you're no longer auditor. If  
you get consent of the client to speak to the other auditor, then I think they would  
tell you the reason they're no longer auditors.3 (our emphasis)  
114  
[
2854] Vance identified3 or acknowledged situations where Castor’s management had  
115  
not been or might not have been forthright. Nevertheless, by an audit in compliance with  
GAAS, Vance opined that C&L should have uncovered material misstatements in the  
consolidated financial statements of Castor for the years ended December 1988, 1989  
3
114  
115  
Vance, March 5, 2008, pp. 147-152  
3
PW-2908, vol. 1, chapter 2, page 2-5 (the “Nasty nine loan” situation)  
500-05-001686-946  
PAGE: 586  
and 1990 (departures from GAAP) of such an extent that C&L should not have issued  
unqualified audit opinions.3  
116  
[
2855] For each of 1988, 1989 and 1990, Vance’s conclusion was that C&L should have  
either denied an opinion or issued an adverse opinion indicating the extent to which the  
financial statements were materially misleading.  
Froese  
[
2856] Froese agreed that Castor management concealed, misrepresented or omitted to  
3117  
apprise C&L of some relevant information.  
[
2857] Froese acknowledged that there were some documents that Castor did not show  
3118  
C&L and might not have shown C&L.  
[
2858] Froese agreed that fraud could be either active or passive. 3119He said it could  
take various forms, and recognized a few:  
•
•
•
Misappropriation of company assets.  
Intentional misrepresentation of financial statements.  
Artificially enhancing financial statements by changing maturity dates if it was  
intentional.  
•
•
Artificially recording the receipt of cash to make loans appears as performing.  
Intentional concealment of a material fact from an auditor. 3120  
[
2859] Froese said “I believe there is deceit and dishonesty and that it wasn't my role to  
3121  
determine whether or not there was fraud.”  
3116  
See PW-2908, vol. 1 chapter 2; Vance, March 5, 2008, pp. 126 and following; Vance, March 10,  
2
008, pp.136 and following (Topic: the SCFP); Vance, April 16, 2008, pp.162 and following (Topics:  
mandate, adequacy of the audits, differences between fraud on the company, fraud on the investors  
and fraud on the auditor); Vance, April 17, 2008, pp. 107 and following; Vance, May 12, 2008, pp. 30  
-252; Vance, May 13, 2008, pp.16, 25-40, 58-68, 93 and following; Vance, Mai 26, 2008, pp.254-261;  
Vance, May 27, 2008, pp. 152 and following; Vance, June 4, 2008, pp. 230 and following; Vance,  
June 5, 2008, pp. 147-149, 188-195; Vance, June 12, 2008, pp. 7-55, 72, 99; Vance, June 13, 2008,  
pp.76 92, 173, 175, 231; Vance, July 7, 2008, pp.78 and following.  
Froese, January 7, 2009, pp.78-81; Froese, January 12, 2009, pp.69-72 and 89-90  
PW-2941-3, paragraphs 3-57, 3-58 and 3-200; Froese, December 8, 2008, pp.71-74  
Froese, December 5, 2008, p. 102  
3117  
3118  
3119  
3120  
3121  
Froese, December 5, 2008, pp. 101-102  
Froese, December 5, 2008, p. 103  
500-05-001686-946  
PAGE: 587  
[
2860] The above mentioned realities were taken into account by Froese. He described  
his mandate as follows and confirmed he had assumed there was fraud in reaching his  
conclusions:  
•
Mandate  
We were asked to provide our opinion on whether or not Coopers & Lybrand  
complied with general accepted auditing standards in relation to their nineteen  
eightyeight (1988) to nineteen ninety (1990) audits of Castor and asked to  
provide an opinion in relation to whether or not, considering the extent of  
alleged fraud by management of Castor, whether it was to such an extent that  
the auditors would have had sufficient information, had they complied with GAAS  
to detect the problem loans in spite of the fraud.3 (our emphasis)  
122  
•
Assuming fraud  
In reaching my opinions in this report, I assumed that there was fraud; it wasn't  
the opposite. So I can understand that being an issue if you were assuming there  
was no fraud. But the assumption was that there are fraudulent acts.3  
123  
[
2861] Froese explained that an auditor can rely on management’s good faith and  
assume that fraud has not occur “unless there are indications or suspicions, so  
something raises an auditor's suspicion about fraud”, in which case the auditor has to  
do more work.3  
124  
[
2862] Froese said section 5300.56 of the Handbook was relevant to the examination of  
the audits since circumstances described therewith were part of the Castor’s audit  
reality:3  
125  
•
•
Over the years, C&L audit staff members noted various circumstances  
where Stolzenberg or other representatives of Castor were reluctant to  
3
126  
or had imposed constraint on consultation of  
provide information  
document3  
127  
.
Two separate audit teams were used - information was not shared  
between the teams - communications between the team members  
were limited, if not inexistent.  
3
3
3
3
3
122  
123  
124  
125  
126  
Froese, November 11, 1008, p. 184  
Froese, December 5, 2008, p. 109  
Froese, November 12, 2008, pp. 73-74  
Froese, November 12, 2008, pp. 76-77  
See AWPs of 1986 and the note of Jean Guy Martin relating to Lambert and the reluctance of  
Stolzenberg. Froese, December 2, 2008, p.125  
3127  
In 1990, C&L was not allowed to make a copy of financial statements. C&L had to write down all the  
numbers (to take time for that purpose while there was very little time to do all the work)  
500-05-001686-946  
PAGE: 588  
[
2863] Having two separate teams and very little communication between them, if any,  
is surprising, said Froese, given that CHL and its overseas subsidiaries were lending to  
the same borrowers or groups of borrowers. Froese cited Penny Heselton, a Montreal  
audit team member, who testified as follows:  
A. The client didn't want - the client wanted to keep things separate. That's all I  
knew.  
Q. And how did you know that?  
A . He told us.  
Q. Mr. Stolzenberg?  
A Well, actually it started off at our office.  
Q What do you mean?  
A.-The staff knew that if you went up to Europe to do the audit, you - or if you did  
the audit in Canada, you'd never go to Europe to do the audit there. It was just  
general knowledge.  
Q. And-how did you know that it was the client that requested it?  
A Hum ... General knowledge and - oh, the first morning I went and met Mr.  
Stolzenberg, I asked him, "If I open up a book, does it mean I can never go to  
3128  
Europe?" He says, "You're here; you can never go to Europe.  
[
[
2864] Section 5300.56 reads as follows:  
During his examination, the auditor may encounter circumstances which while  
not necessarily indicating that management lacks good faith may alert the auditor  
to such a possibility. Examples of such circumstances are:  
(
(
(
a) information being provided unwillingly or only after unreasonable delay;  
b) a limitation in the scope of the examination imposed by management;  
c) identification of important matters which were previously undisclosed.  
2865] In Castor’s case, the following circumstances have to be taken into account:  
The presence of a domineering management (Stolzenberg).3129  
•
3
128  
129  
Heselton, April 26, 1996, pp. 131-132  
Froese, December 8, 2008, pp. 152-154  
3
500-05-001686-946  
PAGE: 589  
•
The evolution of Castor’s business (from loans secured by mortgages to  
loans secured by options, pledge of shares, receivables from affiliates or  
management agreements, and unsecured loans).3130  
[
2866] Froese established that C&L could not blame everything on an alleged fraud by  
Castor’s management. He opined that C&L would not have issued unqualified audit  
reports and audited financial statements, as they did, if they had complied with GAAP  
and GAAS, which they did not.  
Coopers & Lybrand should have concluded, had they added up the loans and  
compared them to appraisals that were available, had they looked at the right  
numbers in appraisals, had they requested financial statements of borrowers,  
they would have concluded that allowances for loan losses were required at  
Castor for a number of different projects and borrowers.3131  
I concluded that there was enough in the loan files and information that should  
have been requested to be able to... to make an overall conclusion that there  
was an issue with problem loans and a collateral shortfall for the loans.3  
132  
[
2867] Froese said the auditors would have come to the conclusion that Ron Smith’s  
comment that a loan was good (as noted by the auditors in the APWs) was not a  
3
133  
reasonable conclusion had the auditors comply with GAAS.  
[
2868] Froese opined that C&L should have been more sceptical on a number of items,  
3134  
and that they had to be to comply with GAAS.  
[
2869] Froese described and explained the methodology he had used as follows (“the  
tapestry”):  
Description  
In relation to fraud, My Lady, I looked at what was in front of the auditors, what  
information they had available to them to determine whether or not it was  
reasonable for them to conclude that there was a collateral shortfall that required  
allowances for loan losses.  
The other approach that could be taken is to look at all of the deceit, dishonesty,  
untold truths, to sort of look at that whole weaving together of a tapestry of  
dishonesty, and to examine sort of each thread that makes up that tapestry, look  
3130  
3131  
3132  
3133  
3134  
Froese, December 2, 2008, pp. 125-126  
Froese, December 2, 2008, p. 126; see also, Froese, December 5, 2008, p.99  
Froese, December 8, 2008, pp. 69-70, 100 and following  
Froese, December 8, 2008, pp.80-82  
Froese, December 8, 2008, pp. 94 and following  
500-05-001686-946  
PAGE: 590  
at it and then say "Is that sufficient to conceal from the auditors the collateral  
shortfalls?".  
So, in my view, there's a few issues in front of the auditors. One is the more  
intricate the tapestry, the more threads to deceit, dishonesty, untold truths that  
make up that sort of tapestry of alleged fraud, the greater the chance that the  
auditors may be aware of some of that. The chance that it triggers that there are  
issues.  
The other side is the auditors have chosen, based on their audit approach, to  
accept a few things in looking at that sort of tapestry. One is they accepted that  
they're two (2) audit teams and the audit teams only communicate through the  
interoffice memo at the end of the year. So, they have sort of two (2) looks at that  
tapestry, one from C&L Montreal, one from C&L Europe's audit teams, and  
they've chosen to plan the audits separately, to carry them out separately, to not  
share information other than through the interoffice memo, and so you've got two  
(
2) chances of looking to that tapestry at what's happening behind it, and you're  
choosing not to communicate with each other what you're seeing, other than in  
that one year-end interoffice memo.  
The second thing is as auditor, you've chosen not to look at who the owners of  
the borrowers are. You've accepted that Lambert, Skyeboat, 321351 Alberta,  
6
12044, 97872, you've accepted that these companies are owned by European  
investors, because you've been told that and you've accepted that they don't  
need to tell you who the actual borrowers are.  
You've also accepted, and whether or not the partner was aware of this or not,  
it's in the audit working papers, but you've accepted that when you look at the  
loan files, you'll only look at them in the presence of Mr. Smith if you're in  
Montreal. You've accepted that you'll only look at loan files for D.T. Smith in  
Europe when the files are in Montreal.  
So, as auditors, you've chosen to not look in some places when you could have  
looked to gather some information.  
You then look - and this was my approach, My Lady, I looked at what's on this  
side of the tapestry - you can look at the tapestry all you want and no matter how  
hard it is to see through, really the question that's important as an auditor is  
what's on this side of the tapestry, what do I have in front of me that can lead me  
to show that there's an issue with this audit, regardless of whatever web or  
tapestry of lies and deceit management has built.  
So, on this side of the tapestry, we know we have Maple Leaf Village, an  
appraisal that shows a hundred and four (104) million as a future potential value,  
sixty-seven point seven (67.7) as a current value. The auditors chose to look at a  
number likely pointed to them by Mr. Smith, without reviewing the whole  
appraisal to see the note on the bottom saying "Look at the previous page, that's  
the real value, don't look at this page, it's on the previous page".  
500-05-001686-946  
PAGE: 591  
You've got loans that when you add them up total more than appraisals, and the  
appraisals are referred to in Coopers & Lybrand's audit working papers. You've  
got financial statements of borrowers that on the occasion that Coopers asks for  
them, something is provided to them, but you've got Coopers & Lybrand  
choosing in their audit strategy to not ask for financial statements for many of the  
borrowers.  
So, they've chosen not to look at York- Hannover Developments Ltd. or KvW  
Investments, or YHDHL, 612044, 97872, Skyeboat, 321351 Alberta. I mean, the  
list goes on of the borrowers' financial statements they've chosen not to look at.  
So, there's a lot of information this side of the tapestry. A lot that's available to  
the auditors to ask for, that they choose not to ask for.  
And in my opinion, in reaching a conclusion on whether the auditors can rely on  
the fraud as concealing the security shortfall from them is looking at that tapestry  
without looking at what's in front of them as auditors. In my view, you look for  
what the auditors should have done, what they had in front of them in drawing  
that conclusion, not at the nice colours of thread in the tapestry of lies and deceit  
and everything else, that I'm sure is there, but it's essentially irrelevant for a lot of  
the collateral shortfalls that were reported on in LECG's report, in my report.  
The issue of whether or not there's a scope limitation, and I was provided a few  
pages on Mr. Levi's report, (inaudible), where Mr. Levi suggests that by definition,  
not knowing the ownership of the borrowers was not a scope limitation, and in my  
view, it's irrelevant, My Lady, whether it's called a scope limitation or something  
else, Coopers & Lybrand accepted management's answer that they weren't going  
to know the names of the borrowers.  
Whether they agreed to accept it or not, whether any auditor or expert says they  
should have not accepted as an answer or not, they did, and its information that  
in my view is important to evaluating the loan loss allowance, and also for  
disclosure.  
I haven't reported on related party disclosure, My Lady, but I just want to make  
the point that if you have allowances for loan losses and those loans are to  
related parties, that's information a financial statement reader will consider  
important. Remember, we looked at materiality on the first day of my testimony,  
it's something that could change the minds of an informed reader. So, if an  
informed reader reading the statements and there's disclosure that the borrowers  
related to, for example, Toronto Skyline, are a related party, and you've got a  
forty (40) or fifty (50) million dollars loan loss allowance for that company, I think  
that's important information for a reader. I don't know if they're related or not, I  
don't know who owns Lambert, but I think that's important information for readers  
to know if they are related.  
In relation to red flags, Mr. Levi suggests some of the items I've raised aren't red  
flags and I could name others, that report section is pretty brief, it wasn't the main  
focus of my work, and we do have memos from Jean-Guy Martin, back in his  
500-05-001686-946  
PAGE: 592  
eighty-six ('86) audit work, where he mentions that Mr. Stolzenberg was  
uncomfortable providing information on Lambert. We have the nasty nine (9)  
loans and no disclosure of who those borrowers are. If you dig into that one, you  
see that there's common addresses, common owners.  
You have fee income in CHIO with D.T. Smith that when it flows through, I  
understand that the journal entries are supported, (inaudible) accounting style,  
with the names of where the money is going and what the commission are or the  
fees are.  
I mention domineering management. That's one of the factors you look at as an  
auditor to look at whether or not there's an increased likelihood of management  
fraud. It's not necessarily a red flag that there's fraud, but it's a fact that you look  
at, on whether or not there's a potential environment or increased risk of fraud.  
Same with the terms of the loans, you've gone from loans that are secured by  
mortgages to loans secured by options, receivables from affiliates, management  
agreements. You got increasing remoteness to the... to real estate in some of the  
collateral for some of those loans, a number that were unconditional, so there are  
loans that are unsecured, it's just promissory notes for them.  
So, over the years, the collateral available for the loans changes, the loans shift  
from being mortgages that have appraisals greater than the loans, I assume, to  
by eighty-eight ('88), it's switched around for a number of loans.  
So simply, just to conclude, in my view, Coopers & Lybrand should have  
concluded, had they added up the loans and compared them to appraisals that  
were available, had they looked at the right numbers in appraisals, had they  
requested financial statements of borrowers, they would have concluded that  
allowances for loan losses were required at Castor for a number of different  
projects and borrowers.  
As you find things like that out, one of the things an auditor looks for, and section  
5
300 has a list of factors an auditor looks for, is information that comes to your  
attention that management hasn't told you about. If you find a number of loans  
that are potentially problem loans and management says everything is good, that  
there are no issues or no problems, that too is an indicator that you have a  
potential issue with management's integrity, and you'd want to do more work.  
So, in my opinion, there were a number of indicators, the biggest of which would  
be the issues with the value of properties compared to what management is  
telling you about those properties, that lead you to the ability to identify properties  
with shortfalls, and management telling you things that don't line up with what the  
underlying documents show.3  
135  
3
135  
Froese, December 2, 2008, pp. 119-127. See also in cross-examination: Froese, December 5, 2008,  
pp. 111 and following  
500-05-001686-946  
PAGE: 593  
Explanation  
Well, what it does it looks at what's available to the auditors. It looks at what the  
auditors should have, in my view, requested. And it looks at what issues that  
would raise to an auditor had they requested that documents... document or  
documents and not been provided.  
So it doesn't ignore fraud completely. What it does, is look at what the auditors  
did and some of the paths you would take. So if you ask for, for example,  
financial statements of YHDL that were audited, what would you get? If you  
asked for... or if you asked to meet with or talk to the auditors of YHDL, what  
would the response be? And if the response is, "No, you can't " or the response  
by York-Hannover is, "No, we won't let you", it raises an issue for a red flag  
basically for the auditors as to whether or not there's an issue here with the  
information we're not getting.  
So I don't think it... the approach I followed ignores fraud. It considers the  
information in front of the auditors, but what, in my view, they reasonably should  
3136  
have requested.  
[
2870] Froese opined that C&L would have seen the need for the huge LLPs he had  
opined were needed in 1988, 1989 and 1990, and would have been able to establish  
them notwithstanding management’s fraud or misrepresentations (assuming it existed),  
3
137  
had they complied with GAAS.  
[
2871] As part of its knowledge of Castor’s business, the lending industry, Froese  
opined that C&L should have known that loan files were expected to contain  
documentation such as loan summaries, commitment letters, correspondence with the  
borrower, internal memoranda providing evidence that the loan was being monitored,  
current audited financial statements from the borrower (or in some cases unaudited  
financial statements), project status reports or similar reporting for projects under  
development, and other documents necessary to understand the current status of the  
loan as at the audit date.  
[
2872] Froese said C&L should have sought the above documentation, including the  
correspondence files, and review it.  
•
It should not have been a problem for the audit of the overseas subsidiary  
taking into account Ford’s testimony that she had an unrestricted access to  
loan files in Europe.  
3
136  
137  
Froese, December 5, 2008, pp. 26-27  
3
PW-2941, volume 1, pages 139 and following; Froese, November 25, 2008, pp.62 and following  
(
TSH), pp. 123 and following (CSH) ; Froese, November 26, 2008, pp.59 and following (MLV), pp.  
19 and following (MEC); Froese, November 28, 2008, pp. 190 and following (YH Corporate loans  
1
and the nasty nine loans); Froese, December 12, 2008, pp. 31 and following (Lambert); Froese,  
January 6, 2009, pp. 89 and following (MLV)  
500-05-001686-946  
PAGE: 594  
•
It should not have been a problem in Montreal either; otherwise C&L would  
have had to consider if it was facing a scope restriction.  
[
2873] Lack of planning and supervision, and insufficient training and knowledge,  
prevented C&L from knowing about, asking for and reviewing existing and available  
documentation.3 This had nothing to do with an issue of fraud.  
138  
[
2874] Froese acknowledged no Handbook section stipulated that auditors had to plan  
3139  
However, he said that auditors  
their audit to detect fraud in 1988, 1898 and 1990.  
had to plan their audit to detect material misstatements resulting either from error or  
from fraud.3  
140  
Rosen  
[
2875] Rosen explained why he had produced an additional report concerning the issue  
of fraud in 2007, PW-3034: he did it further to amendments to the Defendants’ plea that  
3
141  
took place after his report of 1997 was communicated.  
[
2876] Rosen reiterated that C&L had to perform its 1988, 1989 and 1990 audits of  
3142  
For  
Castor in accordance with GAAS, and that they had totally failed such duty.  
example:  
•
C&L should have changed its audit strategy and audit procedures to take into  
account the changes in the reality of Castor (long term lender instead of short  
term – equity loans instead of mortgage loans), which they failed to do, whereas  
3
143  
it was a matter of common sense.  
•
Management letters were “nice to have” but it did not relieve C&L from their  
3
144  
An auditor  
duties. Management letters are not a substitute to gathering SAAE.  
has the obligation to gather SAAE: the very basis of GAAS is that management’s  
assertions as set forth in the company’s financial statements have to be verified.  
•
•
“there's just so many places where Castor management made the evidence fully  
3
145  
available, and yet, it was ignored by Coopers & Lybrand.”  
Facing a situation where there was an inconsistency, C&L had to “probe to the  
bottom”, 3 and they did not.  
146  
3138  
3139  
3140  
3141  
3142  
3143  
3144  
3145  
PW-2941, vol.1, pp. 159-  
Section came into force in 1991 only  
Froese, December 5, 2008, p. 142  
Rosen, February 3, 2009, pp. 34-35  
Rosen, February 17, 2009, pp. 35-37  
Rosen, February 5, 2009, pp. 117 and following; PW-3034, pp. 9 and following  
Rosen, March 24, 2009, p. 43  
Rosen, March 24, 2009, p. 35  
500-05-001686-946  
PAGE: 595  
•
•
Uncovering suspicious circumstances, C&L could not just let go3147, and they did.  
Numerous warnings were available from the books and records of Castor and  
C&L’s own AWPs, namely about the existence and extent of capitalized interest,  
financial problems of borrowers and the use of secrecy jurisdictions. C&L failed  
the take them into account.  
[
2877] Rosen opined that fraud was no excuse given the numerous failures of C&L, as  
revealed by the evidence reviewed, namely their failure to gather SAAE and the failure  
to provide a SCFP.  
[
2878] As Vance and Froese, Rosen listed warning signals, “red flags”, which should  
have been identified by C&L and opined that had C&L act on them, they would not have  
issued their 1988, 1989 and 1990 unqualified audit reports.  
I n the circumstances, F raud is not a defense  
Levi’s assertion as to “Co-conspirators” behaviour  
[
2879] Levi asserts that evidence shows that Wolfgang Stolzenberg and his co-  
conspirators would have produced and did produce whatever documentation was  
required to satisfy the auditors in connection with concealing the fraudulent activities at  
Castor. The Court disagrees.  
Ron Smith  
3
148  
,
[
2880] While he may not have volunteered information when C&L did not ask for it  
evidence shows that Ron Smith provided C&L with answers, information and  
3
149  
.
documents that contradict Levi’s assertion  
[
2881] C&L were provided with negative information by Castor (namely by Ron Smith),  
but the audits of Castor were never adjusted because of such information, while they  
should have been. As explained by Smith: «In my reviews with the auditor, when he  
asked the questions and we did provide what I thought was negative information, there  
3146  
3147  
3148  
3149  
Rosen, February 3, 2009, pp. 85 -86  
Rosen, February 3, 2009, pp. 86 and following  
See as an example: Ron Smith, May 14, 2008, p. 92  
See as examples : PW-1053-95, seq. pp. 183-231; PW-1053-97, seq. pp. 267-277; PW-1053-93, seq.  
p. 153; PW-1053-23, seq. pp. 155-166; PW-1053-19, seq. pp. 163-168; PW-1053-15, seq. pp. 161-  
1
62;. PW-1053-19, seq. p. 253; PW-1053-97, seq. p. 266; PW-1053-95, seq. p. 182; PW-1053-93,  
seq. p. 150; PW-1053-27, seq. p. 131; PW-1053-23, seq. p. 168; R. Smith, September 5, 2008, p. 40;  
PW-1053-23, seq. p. 117; Vance, April 15, 2008, pp. 15-18; PW-2941, Vol. 1, pp. 151-152; See also  
covenants specified in loan agreements.  
500-05-001686-946  
PAGE: 596  
was no difference in how he reacted with me as to when I provided him with the  
information that the project… or loan was acceptable.»3150  
Prychidny  
[
2882] If it is true to say that, at the insistence of Stolzenberg and Dragonas, Prychidny  
3151  
signed a document in 1992 , while the date mentioned on it was 1989 and while the  
content was not accurate, it is something else to suggest that Prychidny would have  
produced or would have accepted to produce or would have upheld whatever  
documentation was required to satisfy C&L in connection with concealing the fraudulent  
activities at Castor. Prychidny explained the special circumstances of this signature, an  
isolated event. Without condoning Prychidny’s gesture, the Court finds nevertheless his  
testimony credible and reliable.  
Lawyers from McLean & Kerr  
[
2883] Four lawyers of the legal firm of McLean & Kerr testified at Defendants’ initiative:  
Leonard Alksnis and Harold James Blake, who were partners of the firm then, and  
Christine Renaud and Soo Kim Lee, who were not (they were associates). The Court  
finds their testimonies credible and reliable.  
[
2884] During 1987, 1988, 1989, 1990 and 1991, Alksnis was the partner in charge of  
the Castor’s file at McLean & Kerr. On behalf of Castor, he handled numerous legal  
matters relating to loans and real estate securities.  
[
2885] Alksnis testified on the various transactions described as year-end cash circles,  
including the “nasty nine loans” and he has explained McLean & Kerr’s involvement in  
relation thereto3  
152  
.
[
2886] The only relevant involvement of Harold James Blake, Christine Renaud and Soo  
Kim Lee is their involvement at the end of 1990 or at the beginning of 1991 in relation to  
the “nasty nine” loans.  
[
2887] Harold James Blake testified no one ever mentioned to him that the transactions  
were secret or had to remain secret, or that he could not or should not talk about them if  
3
153  
he was to receive a call from C&L or anyone else.  
2888] None of the four lawyers were ever contacted by C&L.3154  
[
3
150  
151  
R. Smith, September 16, 2008, pp. 213-218  
3
PW-463 and PW-463A; Prychidny, October 15, 2008, pp.168-171; Prychidny, November 3, 2008, pp.  
8
6-140; Prychidny, November 10, 2008, pp.28-40  
3152  
3153  
3154  
Alksnis, February 6, 2006, February 7, 2006 and February 8, 2006  
Blake, June 18, 2009, pp. 200-201  
Alksnis, February 8, 2006, p. 199; Blake, June 18, 2009, p.200; Renaud, January 26, 2006, p.70; Soo  
Kim Lee, January 25, 2006, p.196  
500-05-001686-946  
PAGE: 597  
[
2889] The Court dismisses Levi’s suggestion that evidence shows McLean & Kerr  
lawyers would have produced or would have accepted to produce or would have upheld  
whatever documentation was required to satisfy C&L in connection with concealing  
fraudulent activities at Castor.  
[
2890] Had C&L complied with GAAS and further investigated any of the year-end  
transactions, including the “nasty nine loans”, as they should have, namely through  
communications with any of those four lawyers at McLean & Kerr after having requested  
and obtained Castor’s consent, if and when needed, the Court has no reason to believe  
those lawyers would have said any more or any less than what they actually knew. Had  
Castor refused its consent, C&L would have had to question themselves as to the  
consequences of such a refusal.  
The German banks  
[
[
2891] Levi asserts that three German banks were “co-conspirators” of Stolzenberg.  
2892] In his report, Levi writes the following which he applies to the three German  
Banks:  
The following description of the open and intentional collusion by several  
banks to assist Wolfgang Stolzenberg with his year end improvement of the  
Castor Holdings Ltd. balance sheet is nothing short of troubling.  
Not only did the banks knowingly provide significant amounts of money to  
Castor Holdings Ltd., they did so knowing that the transactions were to  
camouflage existing situations with related entities and would be reversed  
shortly after the year end.3 (our emphasis)  
155  
[
2893] Regarding Bankhaus H . Auf hauser (“BHA Bank”), Levi writes:  
The Bankhaus H. Aufhauser participated with Wolfgang Stolzenberg in a series  
of year end transactions ("window dressing") which had as its sole purpose  
the elimination of related party transactions from the balance sheet of  
Castor Holdings Ltd. These transactions resulted in the conversion of  
indebtedness to related parties by Castor Holdings Ltd. to indebtedness to a  
bank. These transactions began as early as December 1985 and continued  
annually through to 1991 involving Castor Holdings Ltd. and or other related  
entities.  
Of note is the drastic increase in the amounts beginning in 1989, the time when  
the cash requirements of Castor Holdings Ltd. were escalating and the pressure  
was mounting to show a good balance sheet. 3  
156  
(our emphasis)  
3
155  
156  
D-1347, p.170  
D-1347, p. 171  
3
500-05-001686-946  
PAGE: 598  
By not explaining the true nature of the transaction, the bank has clearly become  
a co-conspirator of Wolfgang Stolzenberg in helping embellish the year end  
balance sheet and deceive the auditor.3  
157  
[
2894] Levi identifies eight transactions that would have involved Raulino, Unionmatex  
and Hertel Aktiengesellschaft, three entities he describes as related parties to  
Castor.3  
158  
[
2895] The first transaction of 1985 concerns Raulino. Six transactions, one every year  
from 1986 to 1991, concern Unionmatex. The last transaction, in 1991, concerns Hertel  
Aktiengesellschaft.  
[
2896] Regarding Bayerische Vereinsbank A.G. (“BV Bank”), Levi writes:  
The Bayerische Vereinsbank A.G. participated with Wolfgang Stolzenberg in a  
series of year end transactions overlapping the 1990 year end. These  
transactions had as their sole purpose the elimination of a related party  
transaction from the disclosure note of Castor Holdings lnternational Finance  
N.V.'s financial statement and the conversion of indebtedness by Castor  
Holdings lnternational Finance N.V. from a related party to a bank.3  
159  
This is yet another example of the control exercised by Wolfgang Stolzenberg  
over his co-conspirators in perpetrating his fraudulent scheme to improve Castor  
Holdings Ltd.'s balance sheet in all areas and to create documentation and  
transactions which concealled the true nature of the related party transactions  
3160  
from the auditors.  
[
[
2897] The transaction, in the amount of DM 8 million, involves Unionmatex.  
2898] Regarding Berliner Handels-Und Frankfurter Bank (“BHF-Bank”), Levi writes:  
The ING BHF-Bank Aktiengesellschaft participated with Wolfgang Stolzenberg in  
a series of year end transactions which had as its sole purpose the elimination of  
related party transactions in the disclosure note of Castor Holdings Ltd.'s  
financial statements. These transactions resulted in the conversion of  
indebtedness to related parties by Castor Holdings Ltd. to indebtedness to a  
bank. These transactions began in December 1983 and continued annually  
involving Castor Holdings Ltd. and or other related entities.3  
161  
3157  
3158  
3159  
3160  
3161  
D-1347, p. 173  
D-1347, p. 171  
D-1347, p.174  
D-1347, p. 176  
D-1347, p.177  
500-05-001686-946  
PAGE: 599  
Of note is the drastic increase in the amounts for 1989 and 1990, the time when  
the cash requirements of Castor Holdings Ltd. were escalating and the pressure  
was mounting to show a good balance sheet.3  
162  
These transactions, like the other bank window dressing, involved a loan from  
the bank to Castor Holdings Ltd. or Castor Holdings International Finance N.V.  
for the purpose of repaying notes payable to the respective related entity which  
increased the amount of bank debt on the Castor Holdings Ltd. balance sheet  
3163  
and eliminated related party loans on the same balance sheet.  
The ING BHF-Bank Aktiengesellschaft was not only assisting Castor Holdings  
Ltd. in falsely improving its balance sheet to eliminate related party transactions  
and deceive the auditor, they were also creating a balance sheet which would be  
viewed much more positively by the other German banks.3  
164  
[
2899] Levi identifies ten transactions, from 1983 to 1990. Four transactions concern  
Luerrsenwerft (1983, 1985, 1987 and 1990) and six transactions concern Unionmatex  
1984, 1985, 1986, 1988 and 1989).  
(
[
2900] No witness asserts that the year-end transactions involving the three German  
banks improved the cash position of Castor. As a matter of fact, several witnesses  
testified that these transactions did not improve the cash position of Castor, and, in fact,  
3
165  
had no adverse impact on the financial statements of Castor.  
[
[
2901] Representatives of the three German banks testified viva voce before the Court:  
•
•
•
Schreyer, formerly of BHA.  
Boberg, formerly of BV.  
Schoeffel, formerly of BHF.  
2902] The testimonies of those three witnesses, credible and reliable, establish that:  
•
The audit confirmation requests that were sent to the banks were “statements  
of open position”, requesting the responding bank to confirm the correctness  
3
166  
of the information set out on the attached statement.  
3
3
3
3
162  
163  
164  
165  
D-1347, p.177  
D-1347, p.178  
D-1347, p.180  
By way of example: Schreyer, August 24, 1995, pp. 54-55; August 25, 1995, p. 43; Boberg, January  
1
4, 1997, p. 73; Rampl, August 25, 1997, p. 80-81; Reiners, May 6, 1997, pp. 138-139; Von  
Michaelis, February 11, 1997, pp. 66-67; Scholz, June 25, 1998, pp. 106-107  
3166  
For BHA, the statements of open position audit confirmation requests, for 1988, 1989 and 1990, were  
filed by Schreyer as PW-3117. These 3 statements of open position had been produced by  
Defendants, with the permission of the Court, and were identified RVM-21 (1988), RVM-22 (1989),  
RVM-8 (1990). For BV, the statement of open position audit confirmation request for the DM8 million  
500-05-001686-946  
PAGE: 600  
•
The banks responded, confirming the correctness of the information set out  
3
167  
on the statement of open position requests.  
o Although the statements of open position did not request the banks to  
confirm whether the proceeds of the loan(s) were restricted or subject  
to any conditions, none of the banks considered, nevertheless, that the  
proceeds of such loans were restricted or subject to conditions. Had  
the statements of open position requested a reply, including  
information as to any restrictions on the use of the funds, the banks’  
reply would have been the same, i.e. no restriction on the use of the  
proceeds of the loans, because that is what the banks knew and  
believed.3  
168  
o There was no intention to deceive the auditor.3169  
o There was no “lucrative fee”.3170  
[
2903] Riedel, formerly from Unionmatex, also testified3171  
.
•
Riedel was associated with Unionmatex from March 1970 to June  
3
172  
3
1995.  
From 1983 to 1992, Riedel was Unionmatex’s managing  
173  
director.  
He worked together with his two colleagues Clemens Broer  
3174  
and Rosemary Archner.  
1
990 year-end transaction (the only year-end transaction that BV was involved in), was produced by  
Boberg together with BV’s reply of February 26, 1991, Exhibit PW-3128, on May 13, 2010, at p.167.  
Note: This statement of open position, together with the letter of February 26, 1991, is part of PW-  
1
134, Bates No. 2572 and 2575 – the letter is in German, with no translation. A translation was  
furnished by Plaintiff during the testimony of Boberg and forms part of PW-3128. For BHF, the  
statements of open position audit confirmation requests were produced during the examination of  
Schoeffel: (PW-3137, for 1989; PW-3138 for 1990); PW-3137 was produced by Defendants as DR-93  
These were prepared by Bänziger to whom C&L gave the control of the audit confirmation process  
3167  
(
something the Court finds C&L should not have done). Bänziger chose to use the statement of open  
position form instead of a usual bank confirmation form. The same applies to the Gotthard Bank’s  
situation.  
3
168  
169  
Boberg, May 13, 2010, pp. 168-169; Schoeffel, May 14, 2010, p. 96. Schreyer, May 12, 2010, pp. 77-  
7
8, 82  
3
Schreyer, May 12, 2010, p. 78, 82; Similar testimony with respect to the banks’ replies to the audit  
confirmation requests can be found in several of the extracts of the examinations on discovery. By  
way of example, Rampl, August 28, 1997, Vol. 4, pp. 256-261; Von Michaelis, February 11, 1997,  
Vol. 2, pp. 53, 70  
3170  
3171  
3172  
3173  
3174  
Schreyer, May 12, 2010, p. 48-50; PW-3114; Schoeffel, May 14, 2010, p. 60-62; also PW-3132.  
Riedel, May 11, 2010  
Riedel, May 11, 2010, p.11. p.80  
Riedel, May 11, 2010, p. 59  
Riedel, May 11, 2010, pp.11-12  
500-05-001686-946  
PAGE: 601  
•
Before he testified, Riedel read a prior testimony rendered by his  
colleague Broer in another file (not in evidence before this Court), and he  
3
175  
could attest that his testimony was to the same effect.  
•
Riedel was responsible for the cash management of Unionmatex. Riedel  
explained that the year-end transactions with Castor and German banks  
were done for Unionmatex’s purposes. On its balance sheet, Unionmatex  
wanted to show deposits with German banks, not too many deposits with  
3
176  
institutions abroad.  
•
•
•
To Riedel’s knowledge, Stolzenberg was not involved with any of the  
3177  
companies, which owned Unionmatex, at least until January 1987.  
At all times, including after 1987, neither Stolzenberg nor anybody at  
3
178  
Castor had influence on the cash management of Unionmatex.  
The deposits made by Unionmatex at German banks were never pledged  
or otherwise given as security to a loan made by a German bank to  
Castor. The only thing Unionmatex did was to give the banks an  
undertaking that some money would return to Castor after year-end,  
nothing else.3  
179  
•
•
The transactions changed nothing on the balance sheet of Castor: instead  
of owing money to a depositor, Unionmatex, Castor owed money to  
banks.3  
180  
Riedel never received any calls or communications from C&L.3181  
[
2904] During trial Plaintiff’s counsel said, and they reiterated in their written  
submissions at the end of the trial, that “some of the words and phrases used by Levi to  
describe the banks’ participation in the year-end transactions are highly inflammatory,  
as well as defamatory”.3  
182  
[
2905] Levi’s opinion as to the “sole purpose” of the year-end transactions, as set forth  
in his report, was the elimination of the disclosure of related party transactions from  
Castor’s financial statements. In his cross-examination, Levi, however, said that his  
report had to be amended to read as follows: «The sole purpose of the year end  
3175  
3176  
3177  
3178  
3179  
3180  
3181  
3182  
Riedel, May 11, 2010, pp. 24-34  
Riedel, May 11, 2010, pp.13 and following, pp.70 and following, pp. 90 and following  
Riedel, May 11, 2010, p. 38, p. 40, p. 44-49  
Riedel, May 11, 2010, pp.40-41, pp.61-63  
Riedel, May 11, 2010, pp. 51 and following, pp. 71 and following  
Riedel, May 11, 2010, p.20, pp.52-53  
Riedel, May 11, 2010, p.54  
Written submission, July 8, 2010, p.261  
500-05-001686-946  
PAGE: 602  
transactions was the elimination of related party transactions and amounts due to  
3
183  
directors, officers and shareholders, as well as their related parties.»  
[
2906] Therefore, Levi’s opinion is based on the following premises, that need to be true  
at all relevant times:  
•
Unionmatex, Luerssenwerft, Hertel and Raulino were each, in its own right,  
related to Castor;  
•
Any transactions between Castor, on the one hand, and any of Unionmatex,  
Luerssenwerft, Raulino, or Hertel, on the other hand, should have been disclosed  
in Castor’s financial statements, either as related party transactions, or as  
payments to directors, officers or shareholders.  
[
2907] These premises are not true as the Court will now explain.  
Luerssenwerft  
[
2908] Luerssenwerft is a corporation that never was a shareholder of Castor even  
though it was one of its depositors.  
[
2909] C&L never considered Luerssenwerft to be a related party to Castor.  
[
2910] In 1988, C&L identified Friedrich and Peter Luerssen as related parties, but not  
3
184  
Luerssenwerft.  
[
2911] Again, in 1990, and whereas Castor’s books and records clearly showed an  
amount of $15.2 million outstanding to Luerssenwerft :  
•
•
Friedrich and Peter Luerssen are identified by C&L as shareholders and as  
related parties.  
Luerssenwerft is not identified as a related party3185  
.
[
2912] During his testimony, Levi said “I never said Luerssenwerft was related”.3186  
2913] Referring to the year-end transactions with Luerssenwerft, Levi stated: “No, first  
[
3
187  
of all, these are not, as I said, related party transactions.”  
3
3
3
183  
184  
185  
Levi, February 3, 2010, p. 63-74 and 100-101  
Vance, April 15, 2010, p. 131-133; PW-1053-92, seq. p.162  
Vance, April 15, 2010, p. 126, 128; PW-1053-88, seq. p. 163 Note: PW-1053-88, seq. pp. 152-167,  
seq. p 152 is the tick legend and list of CHIF’s notes payable as at December 31, 1990, on which  
C&L identifies shareholders with a box, and related companies with a circle; seq. page 163 shows the  
Luerssens identified as shareholders, but does not identify Luerssenwerft, which is listed directly  
beneath them, as related.  
3186  
Levi, February 3, 2010, p. 67  
500-05-001686-946  
PAGE: 603  
[
2914] Levi’s opinion that “These transactions, like the other bank window dressing,  
involved a loan from the bank to Castor Holdings Ltd. or Castor Holdings International  
Finance N.V. for the purpose of repaying notes payable to the respective related entity  
which increased the amount of bank debt on the Castor Holdings Ltd. balance sheet  
and eliminated related party loans on the same balance sheet” does not hold water.  
Unionmatex  
[
[
2915] Unionmatex is a corporation and was never a shareholder of Castor.  
2916] In their AWPs, C&L have never identified or treated Unionmatex as a related  
party.  
[
2917] Unionmatex sued C&L in the Superior Court, district of Montreal.3188 In their plea  
against that claim, dated July 31, 1996, C&L alleged that Unionmatex only became a  
3
189  
Yet, Levi refers to year-end transactions involving  
related party to Castor in 1987.  
Unionmatex that took place in 1984, 1985 and 1986.  
[
2918] In his cross-examination, Levi said that he had not been made aware that a  
representative of Unionmatex had been examined on discovery, even though he had  
requested Defendants’ counsel «to have their paralegals provide me with any testimony  
3
190  
Levi added that he had not either been  
which may be related to these transactions.»  
made aware of the legal proceedings that had been instituted by Unionmatex against  
C&L, although he had requested copies of all litigation in connection with year-end  
transactions.3  
191  
[
2919] Levi was forced to acknowledge that if Castor and Unionmatex were not related  
parties for 1984, 1985 and 1986, he would have no choice but to change his opinion  
that the sole purpose of the year-end transactions was the elimination of the disclosure  
3
192  
Then, Levi said, the references to Unionmatex for the  
of related party transactions.  
3
193  
years prior to 1987 would have to be scratched out of his report.  
[
2920] Riedel testified that, over year-end, Unionmatex would withdraw a portion of the  
funds it had on deposit with Castor. The purpose was to show cash deposited with  
German banks on Unionmatex’s balance sheet, rather than deposits with a foreign  
institution (Castor).3  
194  
3187  
3188  
3189  
3190  
3191  
3192  
3193  
3194  
Levi, February 3, 2010, p. 117  
PW-3110  
PW-3111, paragraphs 192-193  
Levi, February 3, 2010, p. 80 and 85  
Levi, February 3, 2010, p. 98  
Levi, February 3, 2010, p. 100  
Levi, February 3, 2010, p. 110  
Riedel, May 11, 2010, pp. 14-15  
500-05-001686-946  
PAGE: 604  
[
2921] During lengthy discussions with Archner (head of Unionmatex’s bookkeeping  
department), Riedel and Archner would determine how much money on deposit with  
Castor would be withdrawn over year-end, and how much of such sums would be  
placed with German banks, depending on the cash flow needs of Unionmatex.3  
195  
[
2922] Usually, it would be Archner who would contact the German banks with respect  
3196  
to the year-end transactions, but sometimes it would be Riedel himself.  
[
2923] Thus, the year-end transactions were done for the purposes of Unionmatex’s  
3197  
Unionmatex’s  
balance sheet, and were effected solely for the benefit of Unionmatex.  
balance sheet looked better if you had cash on deposit with German banks at year-end,  
3
198  
in contrast to deposits with Castor. That was the main purpose of these transactions.  
[
2924] When asked if he believed that the effect would be to improve the cash position  
3199  
Nor did he consider these  
on Castor’s balance sheets, Riedel replied: «No».  
3
200  
because «it was normal  
transactions to be artificial or fictitious transactions,  
business».3  
201  
[
2925] Following Stolzenberg’s acquisition of an interest in Unionmatex in 1987, Riedel  
confirmed that neither Castor nor Stolzenberg, nor any of Castor’s employees, «had any  
3
202  
nor on the  
influence on our business and especially not on cash management»,  
3
203  
reason and decision with respect to the year-end transactions.  
2926] Riedel testified that: «We did it for our purpose»3204, and he confirmed that at no  
[
time did any representative of C&L ever communicate with him, or to his knowledge,  
3
205  
with Broer, to inquire as to the nature and purpose of the year-end transactions.  
Hertel  
[
2927] Hertel was never a shareholder of Castor and there is no evidence whatsoever  
that Castor and Hertel were related parties; certainly, they were never treated as related  
parties by C&L.  
[
2928] Furthermore, the only impugned transaction with Hertel was for year-end 1991,  
not one of the three relevant years.  
3195  
3196  
3197  
3198  
3199  
3200  
3201  
3202  
3203  
3204  
3205  
Riedel, May 11, 2010, p. 70  
Riedel, May 11, 2010, pp. 68-69  
Riedel, May 11, 2010, pp. 74, 90  
Riedel, May 11, 2010, p. 90  
Riedel, May 11, 2010, p. 20  
Riedel, May 11, 2010, p. 21  
Riedel, May 11, 2010, p. 24  
Riedel, May 11, 2010, pp. 40-41  
Riedel, May 11, 2010, pp. 40-41, 61-62  
Riedel, May 11, 2010, pp. 52-53  
Riedel, May 11, 2010, p. 54  
500-05-001686-946  
PAGE: 605  
Raulino  
[
2929] With respect to Raulino, Levi refers to only one year-end transaction, in 1985, for  
DM 10 million.  
[
2930] Levi admitted that he did not go into detail or look at C&L’s AWPs with respect to  
3206  
any of the year-end transactions prior to 1988.  
[
2931] In C&L’s audit working papers of 1985 for CHIF, C&L listed Raulino as a related  
3207  
this particular working paper lists notes payable to shareholders, C&L  
party:  
identifies Raulino as a related party and C&L indicates a balance owing to Raulino of  
$
17 million. Faced with the content of this working paper, and taking into account the  
amount of the transaction he had identified as “fraud”, Levi had no choice but to admit  
that there would not have been an elimination of disclosure of Raulino as a related  
party. The transaction with the German bank would only have reduced the quantum to  
be disclosed.  
[
2932] As Selman said, the issue of disclosure of related party transactions is  
3208  
therefore, disclosure could not be eliminated even  
qualitative, not quantitative:  
though the amount was reduced.  
Management representation letters  
2933] Each year, Castor issued management representation letters to C&L stating  
[
generally that the information contained in the financial statements prepared to be  
3
209  
Those letters  
correct. These letters were signed by Stolzenberg and Jurg Bänziger.  
stated namely that all balances with shareholders, affiliated companies and other  
related parties as of the end of the year had been identified and disclosed as such in the  
financial statements.  
[
2934] Some information contained in those management representation letters was  
inaccurate, namely information about related parties and restricted cash.  
[
2935] C&L was provided with inaccurate information, but management representation  
letters were no substitute to obtaining sufficient appropriate audit evidence, as Levi  
3
210  
acknowledged . Inaccuracies in management representation letters do not exempt  
C&L from their professional obligations. To the contrary, had C&L complied with GAAS,  
they should have realized the information was inaccurate and moved their audit  
procedures, as suggested by expert Levi, from level 1 to level 2, if not level 3.  
3206  
3207  
3208  
3209  
3210  
Levi, February 3, 2010, p. 91-92  
PW-1053-98, seq. p. 228; Levi, February 3, 2010, p. 122-123  
Selman, June 9, 2009, p. 246  
D-1 and D-2  
D-1347, p. 43  
500-05-001686-946  
PAGE: 606  
Year end cash circles  
[
2936] Starting at the end of 1987, Castor began to reallocate interest among YH loans  
namely through year-end circular transactions involving a number of checks exchanged  
with McLean & Kerr. At year-end, memos explaining the proposed transactions and  
outlining Castor’s instructions were prepared by Mackay and were sent to McLean &  
3
211  
Kerr, who proceeded accordingly . Castor did not disclose to C&L those memos that  
outlined which new loans were being used to pay interest. MacKay testified that he  
would never have shown these memos to C&L, as he would have been fired by  
Stolzenberg.3  
212  
[2937] Nevertheless, C&L was aware of the capitalization of interests.  
[
2938] In Castor’s file, what could be fraud on the investor or the lender is not  
necessarily fraud on the auditor. That distinction between a fraud on the reader  
(
investor or lender) and a fraud on the auditor is well illustrated by the following  
comparison: Castor used the practice of capitalizing interest to create a false picture on  
the reader of its financial statements that interest was being received in cash, when it  
was not; however, Castor never hid this practice from C&L.  
[
2939] Suspicious circumstances existed. Furthermore, some were clearly identified and  
noted by C&L in their audit working papers.  
[
2940] Anderson, the well-known and respected authority in accounting and auditing  
said all experts who testified before the Court, writes:  
It is very important that auditors thoroughly document and review their work in  
order to meet the legal responsibility for the recognition of suspicious  
circumstances. In most of the court cases dealing with negligence in recognition  
of suspicious circumstances, the auditor’s working papers themselves contained  
indications that things were not as they should be. The greater danger seems  
to be not the failure to discover and document clues but the failure to  
recognize them as suspicious. A healthy skepticism should remain an  
important audit ingredient.”3 (our emphasis)  
213  
[2941] In T&T 163 issued in January 1991, C&L wrote:  
“
Competent and sufficient audit evidence continues to be the foundation for  
the auditor’s opinion. Insufficient professional skepticism, illustrated by “auditing  
by conversation”, or failing to obtain solid evidence to back up management’s  
representations, can lead to audit problems. In the final analysis, auditors need to  
3
211  
See for example: PW-173, PW-1056A-8; PW-1056A-9-1 to PW-1056A-9-7; PW-1056A-10; PW-  
1
056A-11; PW-1056B-8; PW-1056B-8A; PW-1056B-9; PW-1056B-10-1 to PW-1056B-10-7; PW-  
1
056B-11; PW-1056C-10-1 to PW-1056C-10-7; PW-1056C-11; PW-1056D-1C; PW-1056D-8  
3212  
213  
Mackay, August 26, 2009, pp. 29-30  
3
Vance, PW-2908, vol.1, chapter 2, page 2-2 and 2-3  
500-05-001686-946  
PAGE: 607  
step back and ask one of auditing’s most fundamental questions: Does it make  
3214  
sense?”  
(our emphasis)  
[
2942] In 1988, 1989 and 1990, C&L failed to obtain sufficient appropriate audit  
evidence; rather, they proceeded through “audit by conversation”.  
[
2943] In 1988, 1989 and 1990, C&L failed to document and review their work and to  
exercise professional healthy scepticism.  
[
2944] C&L never really stepped back and asked themselves “Does it make sense?”  
2945] Wightman admits that C&L could have refused to sign an audit report without  
[
qualification, or simply have refused to sign Castor’s financial statements if C&L had  
been of the view that Castor’s management was not taking appropriate LLPs:  
A I guess the first thing would be to assess the materiality of – the difference if -  
difference so - of mind so existed. Secondly would be to presumably recommend  
that a review be made of it, if there was a difference, and to make sure that  
COOPERS had all of the underlying facts relating to it to make sure that their  
assessment was being made in the proper manner, and with all the facts. To see  
whether they felt that management had applied the proper degree of focus to the  
situation, and failing being satisfied with all of those things, and again assuming  
that the provisions were not - were substantially misstated, I guess COOPERS  
could have advised that they were not prepared to sign the statements  
3215  
without qualification or not prepared to sign the statements at all.  
(
our emphasis)  
[
2946] Had C&L insisted on obtaining sufficient appropriate audit evidence, rather than  
simply accepting management’s representations, they would not have been able to  
issue the unqualified audit reports and the consolidated audited financial statements  
they issued.  
[
2947] Had C&L documented and reviewed their work and exercised healthy scepticism,  
they would not have been able to issue the unqualified audit reports and the  
consolidated audited financial statements they issued.  
[
2948] Had C&L asked themselves “Does it make sense?”, C&L would not have been  
able to issue the unqualified audit reports and the consolidated audited financial  
statements they issued.  
3
214  
215  
PW-1420, tab 30  
3
Wightman, September 29, 1995, Question 71, page 37 lines 5 to 25  
500-05-001686-946  
PAGE: 608  
[
2949] To assume, as did Wightman and other C&L’s audit staff members, that material  
matters had been cleared without any personal verification of the status of the issues  
and without any documentary evidence in the AWPs to support that conclusion was a  
fatal mistake that cannot be attributed to fraud or management misrepresentation.  
[
2950] Accepting the use of a SCNIA instead of a SCFP was a breach of GAAP that  
3216  
.
cannot be attributed to fraud or management misrepresentation  
[
2951] Levi assumed that C&L had obtained sufficient appropriate audit evidence in  
response to concerns they had raised: evidence shows otherwise.  
[
2952] As early as 1986, C&L recognized that up to 80% or 90% of Castor’s off-shore  
revenue was comprised of capitalized interest and fees. C&L obviously understood that  
Castor was not receiving much of its revenue in cash.  
[2953] Had C&L merely insisted upon obtaining the financial statements of borrowers  
called for in the loan agreements, and required by the loan evaluation questionnaires,  
C&L would have determined that Castor’s borrowers were in default of their loan  
covenants, unable to meet their financial obligations to Castor, and that the loans were  
virtually all non-performing. In such circumstances, C&L would have had no choice but  
to ascertain that the purpose of the corporate loans to YH was solely to allow Castor to  
inflate artificially its revenue.  
[
2954] To illustrate the above, the Court refers to one loan made to YHDL, loan 1091  
secured by an assignment of its interest in the Hazelton Lane project, but there are  
numerous similar situations in Castor’s files:  
•
YHDL had to provide its audited financial statements, the audited financial  
statements of the Hazelton Lanes Co-Tenancy and its interim unaudited  
financial statements, and any other information on the project when requested  
by Castor3  
217  
.
•
YHDL could not and did not furnish audited financial statements or any of the  
other required financial information.  
•
•
YHDL failed to respect its loan covenants.  
Such a failure to respect loan covenants would have been readily apparent to  
any auditor conducting an audit in accordance with GAAS.  
3
216  
217  
Vance, March 10, 2008, p.136  
PW-1059-6, p. 4  
3
500-05-001686-946  
PAGE: 609  
[
2955] In the context of account 046/Loan 1153, an account well known to C&L,  
Defendants’ expert Selman acknowledged that «it was quite obvious to the auditors that  
3
218  
the YH companies involved were not able to pay that interest…»  
[
2956] The Court agrees that Castor used the practice of capitalizing interest to create a  
false picture on the reader of its financial statements that interest was being received in  
cash, when it was not, but this practice was not hidden from C&L. It illustrates the  
distinction one needs to make, as Plaintiff’s experts suggested, between a fraud on the  
reader and a fraud on the auditor.  
3218  
Selman, June 2, 2009, pp. 10-11  
500-05-001686-946  
PAGE: 610  
The negligence issue as it relates to valuation letters  
Positions in a nutshell  
Plaintiff  
[
2957] Plaintiff pleads C&L knew that the purpose of the valuation letters was to set the  
fair market value for Castor’s common shares.  
[
2958] Plaintiff submits C&L knew these valuation letters were being used in connection  
with Castor’s fundraising efforts: the share valuation letters were used to induce  
investors and lenders to join and remain members of Castor’s investment club.  
[
2959] Plaintiff adds C&L also knew the valuation letters were being relied upon by both  
current and potential shareholders, as justification for the price they bought and sold  
Castor’s shares.  
[
2960] Plaintiff argues the valuation letters are clear opinions on the fair market value of  
Castor’s common shares as at defined dates. The opinions are unrestricted and  
unlimited and recipients were entitled to rely upon them for the investment decisions.  
[
2961] Plaintiff suggests Defendants intended their opinion in the valuation letters to be  
the fair market value to be relied upon: in the valuation letters, they did not qualify or  
restrict their opinion, while evidence shows they did qualify or restrict opinions in other  
circumstances.3  
219  
[
2962] Plaintiff concludes that C&L did not follow the applicable standards and practices  
for the preparation of the share valuation letters. C&L was negligent and C&L should be  
held liable.  
Defendants  
[
2963] Defendants argue the sole purpose of the valuation letters was to fulfill a  
requirement in the shareholders’ agreement. They allege that the valuation letters were  
not intended to assist investors in their dealings with Castor but were merely intended to  
inform Castor’s directors.  
[
2964] Defendants further argue that C&L was not aware that these valuation letters  
were provided to potential investors.  
3219  
PW-1053-50B-1, seq. p. 166  
500-05-001686-946  
PAGE: 611  
[
2965] Defendants add that several of the statements contained in the valuation letters  
were clearly management representations which did not constitute an opinion of C&L.  
[
2966] Finally, Defendants plead that, even if no mandatory reporting standards had to  
be followed when C&L completed its last letter issued in October 1991, C&L’s valuation  
letters prepared from October 17, 1989 to October 22, 1991 were in compliance with the  
CICBV Code of Ethics and, most notably, articles 4.01 to 4.10 thereof dealing with the  
contents of valuation reports.  
Additional evidence  
Valuation letters: why and what for ?  
[
2967] During a 12-year period, between March 19, 1980 and October 22, 1991, C&L  
3220  
prepared and issued a series of 24 valuation letters , each providing an unqualified  
opinion of the fair market value of the common shares of Castor but no opinion on the  
preferred shares or the debentures.  
[
2968] Those share valuation letters were prepared by Chartered Business Valuators  
(
“CBV”), members of the Canadian Institute of Chartered Business Valuators (“CICBV”),  
3221  
and Wightman signed most of  
namely by Bernard Lauzon and Jacques St-Amour,  
them on behalf of C&L.  
[
2969] From time to time, C&L was asked to assist Castor as auditors and professional  
accountants in establishing the fair market value of its common shares. Except for the  
first valuation letter issued on March 19, 1980, it was always stated in the valuation  
letters that their purpose was “to update previous letters relating to valuation of shares  
3
222  
.
of Castor prepared at various dates”  
[
2970] It was stated in the valuation letters updated by the valuation letters dated  
October 17, 1989 or October 22, 1991 that their intended use in connection with  
Castor’s issuance of new shares was as follows:  
We understand that the purpose of our valuation is to assist you in establishing  
the fair market value of these shares in connection with a possible issue of  
treasury shares of the company3  
223  
.
3
220  
221  
PW-6  
PW-3037, Appendix 11; Defendants’ Plea par. 402; Wightman, August 13, 1996, pp. 16, 34-35, 151-  
54; Kingston, March 9, 2009, pp.156-157  
PW-6 (see also valuation letters dated March 10, 1986, March 4, 1987, March 9, 1988, March 9,  
3
1
3
222  
223  
1989, October 17, 1989, February 28, 1990, September 28, 1990, March 6, 1991)  
3
PW-6, valuation letter dated March 19, 1980 (see also valuation letters dated August 4, 1986,  
November 4, 1986, September 16, 1987, December 4, 1987, September 12, 1988)  
500-05-001686-946  
PAGE: 612  
(
…) the purpose of this updated valuation is to assist you in establishing the fair  
market value of these shares in connection with further issues from treasury  
shares of the company to take place on or about December 31, 19803  
224  
.
We understand that the purpose of this update is to report to the shareholders  
of Castor at the upcoming annual meeting, to be held on March 11, 1983. The  
report may also be used for the possible issue of additional shares3  
225  
.
We understand that the purpose of this update valuation is to report to the  
directors of Castor at the upcoming meeting to be held on March 13, 1984. The  
report may also be used for the possible issue of additional shares3  
226  
.
(
…) the purpose of this updated valuation is to assist you in establishing the fair  
market value of these shares in connection with possible further issues of  
treasury shares of the company to take place on or about December 31,  
3227  
1
984  
.
(
Our emphasis)  
[
2971] The valuation engagement was completed by C&L as auditors and professional  
accountants. C&L routinely billed Castor for «services in connection with establishing  
3
228  
the fair market value of Castor’s common shares».  
2972] Wightman testified there was a link between the valuation letters and the  
[
mechanism referred to in the shareholders’ agreement. Michael Dennis, a director and  
3
229  
.
Castor’s Corporate Secretary from 1988 to 1992, also mentioned such a link.  
[
2973] Widdrington made a connection between the October 17, 1989 valuation letter  
and the definition of “valuation report” found at page 4 of the Restated Shareholders’  
Agreement dated May 10, 1988:  
"
valuation report" means the report of the auditors of the Company as to the fair  
market value of the equity shares of the Company as of the financial year end of  
the Company and reported to the shareholders at the annual meeting next  
following such year end, which report shall be prepared on a basis consistent  
with the assumptions used in prior years and shall be final and binding upon the  
3230  
parties  
.
[
2974] Wightman testified that the valuation letters were issued twice a year because  
Stolzenberg had major director’s meetings that coincided with the issuance of the  
3
224  
PW-6, valuation letter dated October 7, 1980 (see also valuation letters dated April 29, 1981, October  
9
, 1981, October 22, 1982, October 21, 1983 )  
3225  
3226  
3227  
3228  
3229  
3230  
PW-6, valuation letter dated March 3, 1983  
PW-6, valuation letter dated March 6, 1984  
PW-6, valuation letter dated November 14, 1984 (see also valuation letter dated March 19, 1985)  
See, for example, PW-2372-26 (the invoice dated May 18, 1989.)  
Dennis, September. 8, 1995, p. 67-68, PW-2378  
PW-2382  
500-05-001686-946  
PAGE: 613  
letters3 . Dennis’s testimony corroborates Wightman’s testimony that the tabling of the  
231  
3232  
In fact, the  
fair market value opinions occurred at meetings of the board of directors.  
issuance dates of the five last valuation letters coincided with the dates of the director’s  
meetings3  
233  
.
[
2975] None of the valuation letters (and there are 24) refer to the shareholders’  
agreement: this is neither an oversight nor a mistake.  
[
2976] The restated shareholder agreement stipulated that the value was to be  
determined as at the prior year-end, being December 31. In seven of the twenty-four  
valuation letters issued, namely those issued on August 4, 1986, November 4, 1986,  
September 16, 1987, September 12, 1988, October 17, 1989, September 28, 1990 and  
October 22, 1991, C&L opined on value at various different dates other than December  
3
234  
.
3
1
[
2977] Wightman denied knowing that the valuation letters were distributed to anyone  
3235  
other than the directors . In the circumstances thereafter described, Wightman’s  
statement is neither credible nor reliable.  
[
2978] In a memo she sent to Wightman on March 2, 1983 (part of the 1982 AWPs)  
Christine Lengvari, a C&L employee, reported that Stolzenberg had told her that the  
purpose of the updated valuation letter was “for possible new shareholders after board  
meeting”3  
236  
.
[
2979] In a draft letter to Stolzenberg, found in the 1987 AWPs, Wightman stated that  
3237  
the purpose of the valuation letters was to assist Castor in increasing its capital.  
[
2980] Wightman explicitly acknowledged that the purpose of setting the fair market  
value was to enter and exit shareholders, as stated in a letter he sent to Stolzenberg on  
September 23, 1987:  
Because shareholders have come and gone over the years based on these  
valuations and if you intend to raise additional capital in the future based on  
these valuations, it would not be advisable to deviate the value paid significantly  
3238  
from our reports»  
(our emphasis)  
3231  
3232  
3233  
3234  
3235  
3236  
3237  
3238  
Wightman, August 13, 1996, p. 106; Wightman, February 10, 2010, p. 154  
Dennis, September 8, 1995, p. 67-68  
PW-2378; PW-12-4; PW-14-1; PW-15, PW-51  
PW-6 and PW-6-1  
Wightman, February 10, 2010, p.138; Wightman, March 11, 2010, p.58, 77  
PW-1053-50B-2 sequential page 493  
PW-1053-50B-1, seq. pp. 166-168  
PW-665-2, PW-1053-50B-1, sequential page 385  
500-05-001686-946  
PAGE: 614  
[
2981] The 1989 AWPs show that shares were purchased as part of a capital increase  
3239  
which corresponds to the value in the share valuation letter  
at the price of $550,  
dated October 17, 1989. The valuation working papers contain many such documents  
showing subscriptions for new shares that referred to the subscription prices matching  
3
240  
the values contained in the valuation letters.  
Moreover, AWPs also contain  
references to Castor’s «attempt to raise capital base» and to increase deposits from  
European investors.3  
241  
[
2982] While Castor never had more than 14 directors, on March 8, 1991 Wightman  
sent to Stolzenberg 100 copies of C&L’s valuation letter relating to fair market value at  
December 31, 19903  
242  
.
[
2983] C&L’s draft of the October 22, 1991 valuation letter, marked as «S.V.P  
3
243  
3244  
Urgent» , was prepared for the board meeting of October 24, 1991 where Castor’s  
directors discussed the need to raise additional funds. A special request had been  
made to C&L for Castor’s fundraising purposes in the following circumstances:  
The Chairman reported that as a result of the current environment in the banking  
industry Castor had recently experienced a reduction or cancellation of certain of  
its credit facilities (particularly with the Japanese and French banks) which,  
together with the necessity for the Corporation to refinance certain of its  
mortgage loans (where other financing was not available to borrowers), was  
causing a liquidity problem for Castor, which the Chairman was working hard to  
solve. (…)  
The Chairman pointed out that the minimum target for raising funds should be  
$
50,000,000 but ideally $100,000,000 to overcome the present situation and to  
look positively forward towards 1992. The Chairman also stated that further  
support of the present shareholders would be absolutely necessary. In that  
connection the Chairman reported that he had already secured additional capital  
subscriptions from existing shareholders for $1.5.million3  
245  
.
[
2984] Wightman testified that when Coopers prepared the valuation letter of October  
2
2, 1991, he had not been advised that Stolzenberg had recently made a cash call on  
3246  
the shareholders and was organizing a board of directors meeting for that purpose.  
Again, this statement is neither found credible, nor reliable.  
3
239  
240  
PW-1053-20, seq. p. 124  
3
See PW-1053-50A, seq. pp. 23, 25 (National Trust purchased shares at the most current valuation  
letter price).  
3241  
3242  
3243  
3244  
3245  
3246  
PW-1053-50A, seq. p. 75  
PW-2679  
PW-1053-50A, seq. pp. 14-18  
PW-2400-124, PW-51  
PW-51, p.3  
Wightman, February 10, 2010, p. 153-154  
500-05-001686-946  
PAGE: 615  
[
2985] There is no doubt in the Court’s mind that C&L knew precisely why and how the  
valuation letters were being used: the share valuation letters were being used as a  
promotional tool to convince both the new and the current investors of Castor that the  
subscription prices were appropriate and the share valuation letters were included in the  
3
247  
presentation packages sent to prospective investors.  
[
2986] In its valuation letters, C&L associated itself with information issued by  
3248  
.
Castor  
The trends in performance  
[
2987] The trends in performance based on the book value calculation per common  
share as well as the fair market value opinion per common share are shown in graphic  
form in PW-2886 and PW-2886-1 respectively.  
[
2988] Looking at these trends, Defendants’ expert Morrison admitted the results were  
very exceptional” and that Castor’s share valuation trend was more impressive than  
either that of the Bank of America or the Royal Bank of Canada during the same period.  
“
[
2989] In fact, over the period from year end 1984 to year end 1990, the fair market  
value of the common shares, as determined by C&L, more than tripled. The highest  
value ever ascribed to these share valuation letters was $580 per common share, as set  
out in the letter dated March 6, 1991, soon after the 1990 audited financial statements  
were issued, and it was achieved despite C&L’s knowledge of a «slowdown in the real  
estate market in North America».  
[
2990] The value ascribed to the common shares of Castor by C&L in each of the  
valuation letters issued between 1989 and 1991 comprised a premium over the book  
value of such common shares. Morrison acknowledged that the reason that an investor  
would ever pay a premium over book value is primarily based on a forward-looking  
assessment of the future value of a given asset.3249  
[
2991] Less than 4 months before Castor’s collapse, C&L continued to extol the virtues  
of Castor’s business and to opine that the common shares had a value between $550  
and $580.  
[
2992] The historical performance evidenced by C&L’s opinions of value revealed to  
readers that Castor had successfully weathered a downturn in the economy that  
occurred in the early 1980s which suggested that Castor’s management could steer  
Castor through tough times as well as have it benefit from a strong real estate market.  
3247  
3248  
3249  
Simon, June 16, 2009, p. 53  
PW-1419-2A, Section 5020, namely 5020.01 and 5020.04  
Morrison, October 5, 2006, pp. 47-49  
500-05-001686-946  
PAGE: 616  
The valuation letter of October 17, 1989  
[
2993] On October 17, 1989, Defendants issued a share valuation letter for the value of  
st  
Castor’s common shares as at October 1 1989.  
[2994] Under a subheading “Scope of investigation”, C&L namely wrote:  
•
•
We reviewed the audited consolidated financial statements of Castor for the five  
years ended December 31, 1988 and the internal unaudited consolidated  
financial statements of Castor for the nine months ended September 30, 1989.  
We have discussed with officials the current make-up of the assets and liabilities  
and the estimated earnings for 1989  
•
•
In 1987, two debentures of $50 million each were issued.  
In 1988, a $10 million convertible subordinated debenture was issued to a  
shareholder. This debenture was to mature on September 30, 1994 (…)  
Commencing April 1, 1989, the debenture holder had the right to convert the  
debenture into equity units of the company. This right was exercised on  
September 30, 1989 and a portion of the debenture (…)was converted into (…)  
common shares based on $500 per common share(…)  
•
A dividend of $40 per common share was declared at the annual meeting in May  
1989 and paid in July to all shareholders of record as at December 31, 1988.  
[
2995] The share valuation letter of October 17, 1989 states the following under the  
caption Scope of Investigation: “we reviewed the consolidated financial statements of  
Castor for the five years ended December 31, 1988 and the internal unaudited financial  
statements of Castor for the nine months ended September 30, 1989”. Nevertheless,  
3
250  
of the  
Wightman was categorical: C&L did not perform a Section 8200 review  
unaudited interim financial statements at September 30, 1989 and C&L was not  
engaged to do such a review3  
251  
.
[2996] Under the subheading “Main considerations in establishing value”, C&L wrote:  
•
Management estimates that net earnings in 1989 will amount to approximately $  
8 million, up from March’s original forecast of $ 26 million.  
2
•
Consolidated net earnings of Castor amounted $22.2 million for the year ended  
December 31, 1988 compared to $16.1 million in 1987.  
3
250  
251  
PW-1419-2A  
3
Wightman, February 10, 2010, pp. 150-151  
500-05-001686-946  
PAGE: 617  
•
For the nine months ended September 30, 1989, unaudited consolidated net  
earnings of Castor amounted to $21.5 million compared to $ 18.5 million for the  
corresponding period of the preceding year.  
•
•
•
The book value per common share, as at September 30, 1989, is $355.28  
(
Appendix)  
The major Canadian public trust companies are generally trading in the range of  
a price/equity ratio of 1.5 to 2.0.  
We understand that the company intends to maintain future dividend payments at  
$40 per share while retaining a greater portion of earnings to increase retained  
earnings and further improve the financial position of the company.  
[2997] Under the subheading “Opinion”, C&L wrote:  
•
In our opinion, the fair market value of the common shares of Castor, on or about  
October 1, 1989, is in a range of $525 to $ 550 per share.  
Between October 17, 1989 and October 22, 1991  
[
2998] In the 1990 AWPs,3252 C&L recorded: «As per S. Goulakos, the increase in rates  
is due to the deterioration of the economy over the past year and the difficulties faced  
by the real estate market. Banks just aren't willing to lend out money at prime rates for  
risky ventures….».  
[2999] C&L’s internal materials provided, by year end 1990, that:  
«
economic conditions similar to those that arose in 1982 are again having  
significant impact on the real estate industry. … The audit significance of  
3253  
appropriately assessing NRV increases as real estate markets decline”  
and “Realizable values for real estate have dropped sharply in many areas of the  
country over the last several months. In many cases, this represents the reversal  
of a boom market … The real estate market problems affect not only  
developers and other direct investors in real estate, but also those who have  
made loans secured by real estate …. This is the time to be careful and  
conservative in assessing real estate values.»3  
254  
[
3000] In 1990, despite specific knowledge of the problems with the economy, C&L  
began to vary the relationship between the price/equity ratio attributed to the common  
shares of Castor and the corresponding ratio accorded to public trust companies. In  
1
991, at a time when the price/equity ratio attributed to major Canadian public trust  
3
3
3
252  
PW-1053-13, seq. p. 222  
253  
PW-1420, Tab 33, paragraphs 1 and 27 (in particular)  
254  
PW-1420, Tab 29, paragraph 2 under “Valuation of Real Estate”  
500-05-001686-946  
PAGE: 618  
companies had decreased to 1.0, C&L used a ratio as high as 1.4 for Castor, or more  
than a 40% premium over publicly traded trust companies.  
[
3001] At the wrap-up meeting between Wightman and Stolzenberg held on February  
1
5, 1991, it was abundantly clear that Castor was not benefiting from the downturn in  
the economy and that there were problem loans in the Montreal portfolio representing  
millions of dollars. As a result of such problems, Castor’s management undertook to  
take certain actions with respect to the MLV project during 1991: «Capitalize no more  
interest or fully reserve». Castor’s management did not comply with their undertaking:  
interest continued to be capitalized on these loans throughout 1991 and such  
3
255  
.
capitalized interests were part of the alleged net earnings  
The valuation letter of October 22, 1991  
[
3002] On October 22, 1991, Defendants issued a share valuation letter for the value of  
3256  
Castor's common shares as at September 30, 1991.  
[3003] Under the subheading “Main considerations in establishing value”, C&L wrote:  
•
Management estimates that net earnings in 1991 will amount to approximately  
25 million, down from March’s original forecast of $34.25 million, as the result of  
$
a decrease in the spread of interest rates.  
•
•
•
•
Consolidated net earnings of Castor amounted to $31.2 million for the year  
ended December 31, 1990 compared to $28.4 million in 1989.  
For the nine months ended September 30, 1991, unaudited consolidated net  
earnings of Castor amounted to $ 18.7 million.  
The book value per common share, as at September 30, 1991, is $455.77  
(
Appendix)  
Despite the slowdown in the real estate market in North America, management  
does not expect major adjustments to the company's mortgage portfolio or to the  
net earnings. In fact, because of the slowdown additional opportunities may be  
provided for Castor.  
•
•
The major Canadian public trust companies are currently trading at a price/equity  
ratio of approximately 1.0 compared to a range of 1.3 to 1.6 last year.  
We understand that the company intends to maintain future dividend payments at  
$40 per share while retaining a greater portion of earnings to increase retained  
earnings and further improve the financial position of the company.  
3
255  
256  
See PW-167  
3
PW-6-1, Tab 24, at 4  
500-05-001686-946  
PAGE: 619  
[3004] Under the subheading “Opinion”, C&L wrote:  
•
In our opinion, the fair market value of the common shares of Castor, on or about  
September 30. 1991, is approximately $550 to $580 per share.  
[
3005] Defendants' valuation working paper file for this opinion on value included a  
3257  
which  
document entitled «L'industrie canadienne de fiducie, prêt et épargne»  
indicated:  
«
De plus, la valeur de l'indice autant du secteur fiducie, prêt et épargne que celui  
de l'ensemble des entreprises publiques a commencé à diminuer à partir de  
septembre 1989 et d'une façon plus prononcée en janvier 1990 à cause de la  
récession économique au Canada.  
(
…)  
En 1990, la rentabilité des sociétés de fiducie a beaucoup diminué suite à  
l'augmentation du nombre de prêts douteux et certaines sociétés importantes de  
fiducie opéraient même à perte. A cet égard, Standard Trustco Limitée, une des  
importantes sociétés de fiducie, a déclaré faillite en avril 1991.»  
Valuation and Professional standards  
[
[
3006] The CICBV Code of Ethics came into effect in June 19893258  
.
3007] The disclosure standards for reports, CICBV 91-1, came into effect in June  
259  
.
1
9923  
3
260  
purports to set forth  
[
3008] C&L’s internal technical policy statement TPS-A-602  
formal control procedures for valuation assignments. The definition of a valuation  
assignment defines a valuation assignment as follows, at article 2:  
A valuation assignment for the purpose of this policy statement is any  
assignment in which the Firm will be called upon to either express an opinion on  
or estimate the absolute or relative value of any asset or right. On occasion, such  
assignments may require assigning a negative value to a disability, such as in an  
assignment to give a professional opinion on the quantum of damages suffered  
by an injured party. A valuation assignment for the purpose of this policy  
statement would not include instances where the Firm is required to give an  
opinion as to whether or not a value has been properly determined by  
reference to a clear and uncontested formula previously agreed between  
the parties at interest.” (our emphasis)  
3257  
3258  
3259  
3260  
PW-1053-50A, seq. p. 44-46  
Kingston, March 10, 2009, p. 79-81  
Kingston, March 10, 2009, p. 79-81 and 103  
PW-1420-1B, issued on September 1, 1977 as revised on December 14, 1987  
500-05-001686-946  
PAGE: 620  
[
3009] At trial3 , Wightman suggested that C&L’s mandate for the purposes of the  
261  
valuation letters more closely identified with “instances where the Firm is required to  
give an opinion as to whether or not a value has been properly determined by reference  
to a clear and uncontested formula previously agreed between the parties at interest”.  
[
3010] Such a suggestion constitutes an afterthought when we know that during  
3262  
discovery Wightman was not even aware of this technical policy statement.  
Moreover, it is a proposition that does not hold water given the content of the valuation  
3
263  
and Wightman’s own testimony that the method of valuation «varied from time  
letters  
to time depending on circumstances and what the Valuations Department felt was most  
appropriate considerations»3  
264  
.
[
3011] Section 5020.07 of the Handbook3265 reads as follows:  
When a public accountant associates himself or herself with information by  
performing services in respect of that information, the public accountant  
discharges his or her professional responsibilities by:  
(
a) complying with the related rules of professional conduct of his or her  
provincial Institute;  
(
(
b) complying with applicable standards in this Handbook; and  
c) determining whether he or she has appropriately communicated the  
nature and extent of his or her involvement with the information.  
3
266  
stipulate that a chartered  
[
3012] Sections 5020.08 and 5020.10 of the Handbook  
accountant must follow the reporting standards of the Handbook relating to services  
when he or she associates himself with information relating to those services.  
[
3013] Since it is important that the content of any communication issued by a chartered  
accountant not imply that a service was performed when it was not, sections 5020.09  
and 5020.10 of the Handbook invite an accountant, when he or she performs services in  
respect of information - and there are no reporting standards in the Handbook relating to  
those services - to consider whether a communication is necessary or not in order to  
avoid any misunderstanding by the client or third parties as to the nature and the extent  
of the accountant’s involvement with that information.  
3261  
3262  
3263  
3264  
3265  
3266  
Wightman, February. 10, 2010, p. 144-149 (see page 147, lines 8 to 15)  
Wightman, August 13, 1996, p. 20  
PW-6  
Wightman, August 13, 1996, p. 65 (see lines 5 to 8)  
PW-1419-2A  
PW-1419-2A  
500-05-001686-946  
PAGE: 621  
Overview of experts’ opinions  
[
3014] Experts for both the Plaintiff and the Defendants concur that year after year, the  
audited consolidated financial statements and the share valuation letters disclosed  
3
267  
results that were nothing less than spectacular.  
P laintiff’s experts  
John Kingston  
[
3015] John Kingston (“Kingston”) has a Bachelor of Commerce, from Queen's  
University, which he received with honours in 1975. He has two professional  
accreditations: he has been a fellow chartered business valuator (“FCBV”) since 1982,  
and he is a fellow Chartered Accountant (“CA”) registered with the Ontario Institute of  
3
268  
.
Chartered Accountants since 1977  
[
3016] In 1975, Kingston began articling with Price Waterhouse and was in their audit  
group from 1975 to 1978. During that period, he also became part-time involved with the  
valuation group, a new group that emerged within Price Waterhouse. In 1979, he was  
asked to join that group on a permanent basis, which he did.  
[
3017] In 1981, Kingston was asked to join a competing accounting firm, Ernst &  
Whinney, with the specific mandate to create a valuation group for them.  
[
3018] In 1985, Kingston became a partner of Ernst & Whinney. With one of his  
partners, he created a set of policies and standards for valuation mandates and built up  
the valuation group.  
[
3019] Through the product of several mergers, Ernst & Whinney became KPMG.  
3020] Over the years, in terms of size, Kingston worked on valuation of companies  
[
from a sole proprietorship through partnership through large multinational corporations.  
In addition, in terms of industry, his assignments went from food industry to real estate,  
to financial institutions, to manufacturing operations, and to high-tech corporations. He  
was not a specialist of any particular area; rather, his expertise allowed him to handle  
valuations in almost every area.  
[
3021] In November 1999, when he left KPMG, Kingston established his own company,  
eMerging Capital Corp., focusing on emerging high growth companies. eMerging  
Capital Corp. primarily assists companies in sourcing capital so that they can continue  
3
267  
Lowenstein, March 21, 2005, pp. 134-135; Lowenstein, March 23, 2005, pp. 61-62; Morrison, October  
, 2006, pp. 112-113; Morrison, October 10, 2006, pp. 198-199; Morrison, October 11, 2006, pp. 15-16  
5
3268  
Kingston, March 9, 2009, pp.14-15; see also PW-3036  
500-05-001686-946  
PAGE: 622  
to survive and renders valuation opinions or estimates depending on the requirement of  
the client; occasionally, it renders accounting services.  
[
3022] Kingston is the author of a number of articles and textbooks. His textbook  
Valuation of Businesses was published in 1986, and was used by University of Toronto  
and York University. It was also listed on the recommended list of the Canadian Institute  
of Chartered Business Valuators.  
Kingston’s opinion  
[
3023] Kingston expressed the opinion that the share valuation letters were clearly an  
opinion on the fair market value of Castor’s common shares, without any qualifications  
or restrictions whatsoever. Those letters were the result of the exercise of professional  
3
269  
3270  
judgment,  
estimates.  
not the mere application of a pre-established formula . They were not  
[
3024] Kingston said the expression “fair market value” is well known and used in many  
publications.  
[
3025] Whether the reporting format is an opinion letter, a mini-report or a  
comprehensive valuation report, Kingston explained an opinion requires that all the  
work necessary to stand behind such an opinion be done, because it is assumed that all  
such work has been done. The reporting format does not take anything away from the  
value of the opinion; the reporting format is just a means of further disclosure of what  
3
271  
.
was actually done by the valuator to arrive at his conclusion  
[
3026] Kingston pointed out C&L’s dual capacity stipulated in each valuation letter as  
auditor and professional accountant, and explained its importance in terms of  
seriousness and reliability of the end product: as he said about a company, after  
3
272  
.
management, the next most informed group of people are probably the auditors  
[
3027] Kingston emphasized that C&L did not place any limitations on the ways in which  
3273  
Therefore, as CBVs, the authors would  
the share valuation letters could be used.  
clearly understand that the readers would consider that the opinions expressed were  
unqualified, without any restrictions or limitations attached.  
[
3028] Kingston opined that C&L’s internal material for valuation purposes, including  
3274  
C&L’s checklist, which was in force at least since 1982 , was consistent with what  
3
275  
.
valuators, including him, were using during the 80s  
3269  
3270  
3271  
3272  
3273  
3274  
Kingston, March 9, 1989, pp. 66-67  
Kingston, March 9, 2009, pp.66-67  
Kingston, March 9, 2009, pp.67-68  
Kingston, March 9, 2009, pp.71-72  
Kingston, March 9, 2009, pp. 72-73, 116  
PW-2314  
500-05-001686-946 PAGE: 623  
[3029] Kingston pointed out that C&L’s own material stipulated namely that:  
•
•
The checklist (an outline to assist the valuator to ensure that he has undertaken  
all the work that should be considered) should be used in every valuation  
assignment3  
276  
;
There should be a preliminary list of information required to proceed with  
engagement;  
•
•
All worked done should be documented in working papers;  
To the extent C&L felt there was not sufficient information provided to them in  
terms of their analysis, C&L had to note a restriction on the scope of review in the  
valuation letter;  
•
•
The report should include a definition of fair market value;  
C&L should summarize the general economic conditions at the valuation date as  
well as the short-term economic outlook at that time;  
•
•
•
•
C&L should obtain industries’ statistical data and comparable, public and private  
companies’ statistical data where available, and prepare a summary of this  
information;  
C&L should do a comparison of ratios between the valued company and the  
selected comparative industry group. C&L should do a review of the profitability  
and a review of the leverage;  
C&L should examine a reconciliation of income per financial statements and  
taxable income for the two years preceding a valuation date, for unusual or non-  
recurrent reconciling items;  
C&L had to ensure all restrictions and qualifications are clearly set out in the file  
and in the report, including a restriction that the report is not intended for general  
circulation, a restriction that the report should be used only for the stated purpose  
and a restriction in case of inability to expose the company to market;  
•
C&L had to consider the suitability of including a disclaimer paragraph noting that  
C&L had not carried out an audit or that C&L had not sought external verification  
3
277  
.
of information provided by management  
3275  
3276  
3277  
Kingston, March 9, 2009, pp.114, 121-122  
PW-1420-1B (TPS-604)  
PW-2314 ; Kingston, March 9, 2009, pp.122 and following  
500-05-001686-946  
PAGE: 624  
[
3030] Even though there were no codified and binding professional standards until  
1
989 for the CBVs, Kingston opined that in the CBV community, most people knew  
each other and knew their respective practices and policies, which were fairly consistent  
between major firms.3  
278  
[
3031] Kingston testified that the CICBV 1989 Code of Ethics and the 1992 CICBV  
standard 91-1 were a codification of the existing practices and policies at the time C&L  
wrote its various valuation letters. The existing practices and policies of the 80s, he  
admitted however, were not mandatory standards before the Code of Ethics and the  
standard 91-1 came into force3  
279  
.
[
3032] Kingston opined that C&L did not follow the applicable practices and policies for  
the preparation of the share valuation letters, a proposition stated as correct by Selman  
3
280  
.
if the Court was to conclude that the letters were valuation letters  
[
3033] Kingston expressed the opinion that C&L did not follow the applicable practices  
and policies in many respects, including, inter alia:  
•
the very limited and insufficient working papers in support of each of the  
281  
;
valuation letters3  
the very limited and insufficient analysis to support C&L’s opinions3282  
the absence of rationale to support the valuation method chosen by C&L to  
•
•
;
3
283  
;
evaluate the shares of Castor  
the lack of analysis of the financial statements in terms of trends and ratios3284  
the absence in the C&L working papers of a list or a summary of the questions  
•
•
;
3
285  
;
discussed with management and answers provided thereto  
•
•
the failure of C&L to document in their working papers any discussions to  
3
286  
;
reconcile their conclusions on the results of different valuation methods  
the failure of C&L to conduct any comparability review on the trust companies  
3
287  
selected as comparable to Castor.  
3278  
3279  
3280  
3281  
3282  
3283  
3284  
3285  
3286  
3287  
Kingston, March 9, 2009, p. 99  
Kingston, March 10, 2009, p. 81 and 99 and following  
Selman, May 25, 2009, p. 76  
Kingston, March 9, 2009, pp.89 and following  
Kingston, March 9, 2009, pp. 89-90  
Kingston, March 9, 2009, pp.90-91  
Kingston, March 9, 2009, pp.89-90  
Kingston, March 9, 2009, p.90  
Kingston, March 9, 2009, pp.87-88  
Kingston, March 9, 2009, p. 90  
500-05-001686-946  
PAGE: 625  
[
3034] Kingston concluded: «In summary, there is just a consistent lack of analysis and  
review, including comparability review, undertaken to support the conclusions on fair  
market value. The working papers are […] in contravention of a number of different  
3
288  
CICBV policies. They are in contravention of C&L’s own checklist. »  
[3035] Kingston did not attempt to determine the fair market value of Castor’s shares at  
any stated date. His role was to provide an opinion to the Court on the valuation work  
performed by C&L. However, after having identified numerous errors committed by C&L  
and, in an attempt to demonstrate to the Court the impact of such mistakes on the  
calculation of the fair market value of Castor’s shares, Kingston demonstrated that C&L  
should have concluded that the fair market value of Castor’s shares could be as low as  
nil for the period between 1988 and 1991.  
Lowenstein  
[
3036] Lowenstein, a plaintiff’s expert on reliance, noted the following paragraph in the  
valuation letter dated October 22, 1991:  
"
Despite the slowdown in the real estate market in North America, management  
does not expect major adjustments to the company's mortgage portfolio or to the  
net earnings. In fact, because of the slowdown additional opportunities have  
been provided for Castor."3  
289  
[
3037] And Lowenstein opined that “for a conservative careful institution or organization,  
such as a major accounting firm (such as C&L), to incorporate that in a valuation report  
suggests that before doing so — one would expect that before doing so, they would be  
very confident in that statement.”  
3
290  
D efendants’ expert S elman  
[
3038] Selman discusses the valuation letters in his written report, but as he reiterated  
during his cross-examination on qualification, he did not consider those valuation letters  
3
291  
as valuation reports . In fact, Selman opined that the standards were not applicable to  
the valuation letters in this case; Selman believed the valuation letters were intended to  
3
292  
.
meet the requirement of the shareholders’ agreement  
[
3039] If the Court was to conclude otherwise, Selman acknowledged, he had no  
3293  
.
quarrel with the practices and policies described by Kingston  
3288  
3289  
3290  
3291  
3292  
3293  
Kingston, March 9, 2009, p. 91  
PW-6-1, Tab 24, at page 4  
Lowenstein, March 21, 2005, p.189 (see lines 13 to 17)  
Selman, May 4, 2009, p.187  
Selman, May 22, 2009, p.124 (see lines 7 to 9)  
Selman, May 22, 2009, p.136  
500-05-001686-946  
PAGE: 626  
[
3040] Selman agreed that the valuation letters did not accord with the Canadian  
3294  
Institute of Chartered Business Valuators standards.  
[
3041] Selman indicated that Coopers & Lybrand had not signed the letters as CBVs or  
stated that they were prepared by Coopers & Lybrand acting as CBVs. Rather the  
valuation letters were signed by C&L as auditors and professional accountants3  
295  
.
[
3042] Selman mentioned the definition of “fair market value” included in the restated  
shareholders agreement.  
"
fair market value", when applied to shares of the Company, means (i) in respect  
of preferred shares, the stated capital amount thereof,. and (ii) in respect of  
equity shares, the fair market value thereof conclusively determined by the  
applicable valuation report, plus an amount equal to the anticipated dividends, if  
any, referred to in such report and deducted in determining fair market value  
which are attributable to the· equity shares for which fair market .value is being  
determined hereunder, if such dividends have not been paid on such equity  
shares prior to the closing of the sale and purchase thereof;3  
296  
[
3043] This being done, Selman opined that there were many definitions of the  
expression “fair market value”, since shareholders of a company need not use the  
definition of fair market value used by valuators or the legal definition of fair market  
value3  
297  
.
[
3044] Selman said it would have been clear to any reasonably experienced investor  
that these letters were not comprehensive valuations of Castor's stock and did not  
3
298  
contain the type of analysis that a reasonably experienced investor could rely on.  
[
3045] Selman added that the comparison of a private company's stock with publicly  
3299  
and that a comparison with the major  
traded stocks was, of itself, superficial  
Canadian trust companies was not useful3300.  
[
3046] Finally, Selman pointed out that what C&L had done was not a review within the  
meaning of Section 8020 of the Handbook, contrary to what other experts had  
suggested.  
[
3047] Selman stipulated that if the audited financial statements were materially  
misstated and misleading, so were the valuation letters.  
3294  
3295  
3296  
3297  
3298  
3299  
3300  
Selman, May 22, 2009, p.136  
Selman, May 22, 2009, p.126  
PW-2382  
Selman, May 22, 2009, pp.127-128  
Selman, May 22, 2009, p.125, 130  
Selman, May 22, 2009, p.131-132  
Selman, May 22, 2009, p. 131  
500-05-001686-946  
PAGE: 627  
[
3048] In cross-examination, Selman said:  
That's why I have said all the way through this thing that I view these things as a  
chain of letters that remain there to meet the requirements of a group of  
shareholders under a shareholders agreement, and they were nothing more.  
So I don't see, reading the whole of the letter that someone would be with... an  
experienced person would review it as a opinion of value prepared in a normal  
fashion. The wording is unfortunate, no doubt, but I still don't believe that the  
letters are intended to express that or do they imply that to somebody who's  
3301  
experienced in reading it . ( our emphasis)  
[
3049] When asked what he meant by “the wording is unfortunate, no doubt”, Selman  
added “it would have been nice if they had used some terminology that indicated that it  
was a limited expression”3  
302  
.
[
3050] Cross-examination revealed that Selman had significantly softened his remarks  
in his 2008 written report, as compared to his 1998 report, concerning C&L’s  
responsibility for the content of its valuation letters, those changes being done  
3
303  
.
according to Selman to “improve” his report  
•
•
•
•
Although Selman had previously stated that the valuation letters did not meet the  
standards of the Canadian Institute of Chartered Business Valuators and the  
valuation practice,3 he omitted that statement from his 2008 report.  
304  
Selman made a statement in paragraph 6.06 of his 1998 report that Wightman  
was not a member of the CICBV and not personally bound by its standards. He  
3
305  
omitted that statement from his 2008 report.  
Although his 1998 report stated that C&L’s comparison to trust companies was  
3
306  
Selman’s 2008 report states that the comparison  
insufficient and not valid,  
was merely “superficial” and not “useful”.  
3
307  
Selman’s previous text that the valuation letters did not address the different risks  
between Castor and the trust companies was omitted from his 2008 report. He  
similarly omitted text that interprets a decrease in Castor’s investors’ yields to  
mean that the implied risk of the Castor shares was being described as  
3
308  
significantly decreasing.  
3301  
3302  
3303  
3304  
3305  
3306  
3307  
3308  
Selman, May 25, 2009, p.79  
Selman, May 25, 2009, p. 79  
Selman, May 25, 2009, pp.127, 128, 129, 133 and 134  
PW-3049, paragraph 6.06  
PW-3049, p. 179; Selman, May 25, 2009, pp. 124-127; May 26, 2009, pp. 185-186  
PW-3049, paragraph 6.2  
D-1295, p. 378  
Selman, May 26, 2009, pp. 177-180. See PW-3049, paragraphs 6.02, 6.03  
500-05-001686-946  
PAGE: 628  
•
Selman excluded, from his 2008 report, the following statement from paragraph  
.04 of his 1998 report3  
309  
:
6
«
Notwithstanding, I am of the view that it would have been better to issue them  
with a clearer warning that the expression of opinion was based on very limited  
assumptions and might not be appropriate for the reader's purposes.»  
[
3051] It is noteworthy that Selman was not prepared to acknowledge that saying the  
following was a criticism of C&L :“it would have been better to issue them with a clearer  
warning that the expression of opinion was based on very limited assumptions and  
might not be appropriate for the reader's purposes”.  
3
310  
.
[
3052] It is also noteworthy that Selman was unable to explain why all the other above  
3311  
mentioned changes had been made to his report.  
Analysis and conclusions  
Misleading information and overstated valuation  
[
3053] The key elements of the methodology followed for determining the fair market  
value of Castor’s shares are apparent from the contents of the letters themselves: the  
financial statements of Castor, audited and non-audited, the net earnings, the 100  
million debentures transaction and the $40 million of dividends are such key elements.  
[
3054] The corollary of the conclusions previously reached regarding the consolidated  
audited financial statements, the net earnings and the 100 million debenture  
transaction, are that :  
•
•
C&L used materially misstated and false information;  
Castor’s common shares could not and should not have been valued as they  
were;  
•
The valuation letters issued between January 1, 1988 and October 22 1991  
presented inappropriate and misleading information.  
st  
[
3055] Even though the “fair market value” of Castor’s common shares at October 1  
1
989 and September 30, 1991 has not been precisely established - and in the  
circumstances, it was not necessary- the Court does not hesitate to conclude that the  
fair market value of Castor’s common shares, as of these dates, was nowhere close to  
3309  
3310  
3311  
Selman, May 25, 2009, pp.127-128  
Selman, May 25, 2009, p.10,131-132  
Selman, May 25, 2009, pp. 51-52, 127-129, 131; May 26, 2009, pp. 151-157, 171-176  
500-05-001686-946 PAGE: 629  
the values mentioned in the valuation letters dated October 17, 1989 and October 22,  
1991.  
Purpose and valuation letters  
[
3056] There was a link between the valuation letters and the restated shareholder  
agreement, i.e. the valuation letters were used as the “valuation report” mentioned in  
the restated shareholder agreement. Therefore, to provide this tool might have been  
one of the purposes for which C&L’s services were retained, but it was not “The  
purpose”, as Defendants suggested.  
[
3057] Defendants’ position that the valuation letters would have been issued for the  
sole purpose of the shareholders’ agreement does not hold water:  
•
The letters were issued more often, and on different dates, than the restated  
shareholders’ agreement mandated;  
•
•
All the valuation letters contain specific wording as to purpose;  
None of the twenty-four valuation letters refer to a shareholders’ agreement;  
and  
•
C&L admitted that a purpose of the valuation letters was to «assist the  
company in establishing the fair market value of its shares in connection with  
3
312  
further issues of treasury shares of the company».  
Nature of opinion  
[
3058] A basic reading of the share valuation letters reveals that they are unqualified  
opinions by C&L of the fair market value of Castor’s common shares.  
[
3059] Without a definition of “fair market value” mentioned in the valuation letters,  
reference to the definition used by valuators is appropriate.  
Negligence  
[3060] C&L were negligent.  
3312  
Defendants’ Plea dated July 31, 1998, paragraph 401.; Decision of this Court on May 20, 2009  
(
transcription May 20, 2009, pp.6-30 and Trial minutes May 20, 2009); leave to appeal denied, P.  
Dalphond J.A. dated October 7, 2009 [2009] QCCA 1890; decision dated February 3, 2010, [2010]  
QCCS 453; leave to appeal denied, decision A. Rochon J.A. dated April 16, 2010, [2010] QCCA 714  
500-05-001686-946  
PAGE: 630  
[
3061] The Court shares Kingston’s point of view, Kingston’s opinions, which rest on an  
appropriate understanding of the evidence.  
[
3062] Selman’s opinions, resting on the basic premises that the sole purpose of the  
valuation letters would have been to comply with the terms of a shareholders’  
agreement and that C&L was ignorant of any other use, do not hold water.  
[
3063] The valuation letters were valuation reports of the fair market value of Castor’s  
common shares to be used and used for fund raising purposes and C&L knew it. In the  
absence of disclaimers, qualifications or restrictions, readers were allowed to take them  
at their face value, as valuation of the fair market value of Castor’s common shares  
prepared by auditors and professional accountants.  
[
3064] Notwithstanding the clear and precise internal policies and practices in force at  
C&L at all relevant times, there were no disclaimers, no qualifications and no restrictions  
in C&L’s valuation letters. C&L never once mentioned the shareholders’ agreement in  
the twenty-four valuation letters it issued.  
[
3065] The absence of disclaimers, of qualifications, of restrictions and of mention of the  
shareholder agreement was not an oversight; it was a conscious gesture.  
[
3066] Playing with words was far from complying with C&L’s own standards and with  
applicable policies and practices of valuation.  
[
3067] C&L associated themselves with Castor’s financial information and general  
information, with Castor’s unaudited financial statements and with perspectives on the  
state of the economy, on the state of the lending business and on its opportunities for  
Castor. Contrary to section 5020 of the Handbook, they did not appropriately  
communicate the nature and extent of their involvement with the information, while such  
a communication was necessary to avoid misunderstanding.  
[
3068] The Court of Appeal acknowledged that, even though the provisions of the  
Handbook or of the CICBV are not binding on the Court, such dispositions are useful to  
determine if there is a fault:  
«
On nous a également fait longuement état des pratiques comptables  
généralement reconnues et des dispositions du Code de déontologie des  
comptables agréés. Eu égard à ces normes qui, si elles ne lient pas le Tribunal,  
ont cependant une utilité indiscutable dans la détermination de la faute, je suis  
d’avis que les comptables intimés ont effectivement commis des fautes  
3313  
civiles.»  
3313  
Caisse populaire de Charlesbourg c. Michaud, [1990] J.Q. no 673 at 8 (Qc. C.A.). See also Malo v.  
Michaud, [1993] R.R.A. 760 at para. 78, AZ-93021590, J.E. 93-1551  
500-05-001686-946  
PAGE: 631  
[
3069] It is true to say that C&L’s valuation letters were not comprehensive reports, in  
the format. Nevertheless, they were unqualified professional opinions issued by a well-  
known and respected chartered accounting firm having, as Castor’s auditors since its  
inception, full and detailed knowledge of Castor’s business and Castor’s financial  
situation.  
[
3070] Therefore, having issued twenty-four valuation letters on Castor’s common  
shares fair market value attesting to exceptional results, C&L cannot reasonably argue  
that readers should have granted very little credibility, if any, to their valuation letters. As  
my colleague Justice Benoît Emery wrote:  
«
[29] […] Ainsi, un professionnel ne peut affirmer qu'un terrain est propre à la  
construction d'un édifice pour ensuite plaider que le degré d'analyse est à ce  
point superficiel qu'il ne faut pas accorder beaucoup de crédibilité à la  
conclusion.  
[
30]  
[…] Si tant est que le niveau d'analyse du type Phase I est à ce point  
superficiel, le tribunal est d'avis que le professionnel ne peut alors certifier qu'on  
peut ériger sur ce sol un édifice de type résidentiel, commercial ou industriel.  
Face à une conclusion aussi affirmative, une personne raisonnablement  
informée comme l'acheteur en l'espèce est en droit de s'attendre au bien-fondé  
de cette assertion. D'ailleurs, même si le rapport P-2 est adressé à la  
venderesse, la défenderesse savait que ce rapport allait être utilisé pour les fins  
de la transaction avec la demanderesse.»3  
314  
[
3071] Before lending its name and reputation to any statements in a valuation letter,  
C&L should have done the appropriate work to satisfy itself of the accuracy of any such  
statement. Otherwise, C&L should have included clear and precise disclaimers,  
qualifications or restrictions into its valuation letters.  
[
3072] While an accountant who prepares a simple balance sheet may not be  
responsible if the numbers provided to him by his client are false, the same cannot be  
said of a share valuation letter, where the auditor attaches his professional opinion to  
the statement without qualification or restrictions, attesting therefore to third parties that  
he has followed the appropriate procedures and verified the accuracy of the information  
that he has provided3  
315  
.
[
3073] As Kingston explained, there were many steps C&L ought to have taken before  
issuing their valuation letters that C&L did not take. For example :  
3
314  
3
979687 Canada Inc. c. Les Consultants LBCD Inc. [2010] QCCS 905, paragraphs 29-30 (j. Emery),  
AZ-50616047, J.E. 2010-664  
3315  
Caisse populaire de Charlesbourg c. Michaud, [1990] R.R.A. 531 at 2 (Q.C.A), AZ-90011568, J.E. 90-  
8
14  
500-05-001686-946  
PAGE: 632  
•
C&L were aware of the increased risk to Castor’s portfolio because of the  
downturn in the real estate market well before they issued the October 1991  
valuation letter and they acted as if such risk did not exist.  
•
In 1990, Wightman recorded the information that Hotels were in a difficult  
position because of declining interest rates and recorded the decision to cease  
3
316  
In fact, Castor’s management did not  
capitalizing interest on these loans.  
cease the capitalization of interest - which is evident in the general journal and  
the mortgage and loan ledger cards - but C&L did nothing to confirm that  
management was fulfilling its commitments prior to their issuance of the share  
valuation letters in March and October 1991.  
[3074] Playing with words is not acceptable; everyone has to face its doings.  
3316  
PW-1053-12, seq. p. 84. See also PW-6-1, Tab 23 and Tab 24 and PW-167D  
500-05-001686-946  
PAGE: 633  
The negligence issue as it relates to Legal for Life  
Certificates  
Positions in a nutshell  
Plaintiff  
[
3075] Plaintiff argues that:  
•
•
The Court has judicial notice of the various statutes under which the Legal for  
Life Opinions were issued. Therefore, no evidence was needed.  
If the Court concludes that the audited financial statements were materially  
misstated, she must conclude that the Legal for Life Certificates were  
misstated as well.  
•
By incorrectly certifying that Castor met the requisite tests to enable it to hold  
itself out as a safe and creditworthy investment worthy of Legal for Life  
Status, Defendants acted negligently and committed a fault.  
Defendants  
[3076] Defendants argue that:  
•
The Court does not have judicial notice of the various statutes since, for  
article 2809 CCQ. to apply, the statutes needed to be specifically alleged in  
the proceedings, and they were not.  
•
There is no evidence of the standards for the preparation of Legal for Life  
Certificates, nor of the criteria dictated by the various statutes under which the  
Legal for Life Opinions were issued. Therefore, it cannot be said that Legal for  
Life Certificates contained errors and were materially misleading.  
Additional Evidence  
[
3077] Simon’s principal responsibility was to find depositors or lenders. For that  
3317  
.
purpose, he maintained and updated information material that Castor had available  
3317  
Simon, April 23, 2009, p. 113  
500-05-001686-946  
PAGE: 634  
[
3078] Firstly, he developed relations with various European banks and their  
3318  
.
subsidiaries in Canada and the United states  
[
3079] Secondly, he explored the market of financial institutions such as trust  
companies, insurance companies or pension funds and found that in order to invest in  
3
319  
.
Castor those institutions needed a Legal for Life Opinion  
3080] The tests of eligibility for Legal for Life Status were derived from the Canadian  
[
and British Insurance Companies Act (“CBICA”). Particularly, section 63 CBICA limits  
3
320  
investments to companies that meet the tests provided therein.  
3081] Financial results on a period of five consecutive years were needed to obtain a  
[
3
321  
Legal for Life Opinion . Therefore, after the 1983 audited financial statements were  
3
322  
.
completed, Castor sought a Legal for Life Opinion  
[
3082] C&L prepared a letter confirming that Castor met the tests. C&L’s certificate was  
conveyed to Castor’s legal counsel McCarthy Tétrault. McCarthy Tétrault sought to  
verify with the various provincial jurisdictions through local counsel that Castor, based  
on C&L’s certificate, qualified for investments by trust companies, insurance companies,  
trustees, pension funds, and that those financial institutions could invest money with  
3
323  
.
Castor without resorting to a special provision  
[
3083] That done, McCarthy Tétrault issued a Legal for Life Opinion to the effect that  
Castor’s shares or notes could legally be acquired by various financial institutions  
3
324  
.
governed by various statutes listed in their Opinion  
[
3084] From 1984 and thereafter, C&L and McCarthy Tétrault repeated the exercise  
each year and provided Castor with a Legal for Life Status.  
[
3085] These Legal for Life Opinions were addressed and provided to Stolzenberg, as  
Castor’s chief executive officer. The various statutes on which Castor’s lawyers  
3
325  
required that the auditor of the company confirm the necessary financial  
opined  
information. The Legal for Life Opinions issued by McCarthy Tétrault were based on  
3
326  
Legal for Life Certificates issued by C&L.  
[
3086] In their Legal for Life Opinions, McCarthy Tétrault explicitly stated that they had  
received and examined C&L’s certificate on which they were relying.  
3318  
3319  
3320  
3321  
3322  
3323  
3324  
3325  
3326  
Simon, April 23, 2009, pp.114-115  
Simon, April 23, 2009, p.116  
PW-1420-1B, TPS-A-405  
Simon, April 27, 2009, p.102-103  
Simon, April 23, 2009, p.117  
Simon, June 16, 2009, pp.69-70  
PW-7  
PW-7  
500-05-001686-946  
PAGE: 635  
[
3087] The document provided by Castor to any potential investor was the Legal for Life  
3327  
.
Opinion itself, not the certificate of the auditor  
[
3088] Simon used Legal for Life Opinions, specifically to raise money from insurance  
companies, trust companies, pension funds and trustees, but he also used the  
information memorandum and the Legal for Life Certificate, contained in the Legal for  
Life Opinion, as general marketing tools since having such Legal for Life Status said  
something about the creditworthiness of Castor and the quality of an investment in  
Castor3  
328  
.
[
3089] As Simon said, Legal for Life Status was useful as a form of endorsement of the  
3329  
credit quality of Castor since Castor did not have a rating from any rating agency.  
[
3090] Legal for Life Opinions enabled Castor to attract investments from institutional  
investors, such as pension funds and generally gave Castor the appearance of being a  
safe investment.  
[
3091] Castor’s brochures including the five-year summary of the audited financial  
statements and the reference to Castor’s Legal for Life Status were being used by  
3
330  
lenders and investors contemplating doing business with Castor.  
Wightman kept  
331  
and on occasion, distributed them to third parties  
3
such brochures in his office  
contemplating doing business with Castor.  
3
332  
[
3092] The Legal for Life Certificates were a «significant affirmation of the financial  
3333  
which were intended to be relied upon by third parties «as a  
health of the company»  
3
334  
form of endorsement of the credit quality of Castor».  
[
3093] While Wightman denied at trial knowing the use of the Legal for Life  
3335 3336  
the evidence is clear that he knew and, in fact, used the Legal for Life  
Certificate,  
3
337  
Status to promote Castor.  
[
3094] While Wightman would not admit the general impact of this designation on the  
perception of Castor as a safe investment, he found it relevant to explain Castor’s Legal  
3
3
3
3
327  
328  
329  
330  
PW-2374  
Simon, June 16, 2009, pp.75-76, 79, 80, 81 ; see PW-2473, PW-2474-2 and D-187  
Simon, June 16, 2009, p.81 (see lines 11 to 18)  
PW-1057-1, PW-1057-2, PW-1057-3; Wightman, March 11, 2010, pp. 36-38; Wightman, September  
13, 1996, pp. 109-110  
3331  
3332  
3333  
Wightman, March 11, 2010, p. 38  
Wightman, February 10, 2010, p. 131  
Lowenstein, March 21, 2005, p. 159, line 9  
Simon, June 16, 2009, p. 81  
3
3
334  
335  
Wightman, February 10, 2010, p. 139  
Wightman, March 10, 2010, pp. 85-86  
PW-1053-6, seq. p. 103-105  
3336  
3
337  
500-05-001686-946  
PAGE: 636  
for Life Status to one of his partners at C&L in Germany whose client was considering  
depositing with Castor:  
«
Castor is not a bank in Canada, but is a mortgage lending company and is  
qualified for issuing notes to major institutions in Canada including life insurance  
companies, pension funds, trust companies, etc.»3  
338  
[
3095] C&L’s technical policy statement, TPS-A-405, implies that due to the complexity,  
professional judgment must be exercised in determining eligibility for this significant  
status.3  
339  
[
3096] C&L’s internal policy on the preparation of such certificates recognized the goals  
of obtaining Legal for Life Status indicating that «most corporate issuers attempt to  
establish their securities as being legal for life because insurance companies represent  
a large share of the investment market and because eligibility under these provisions is  
3
340  
often considered to indicate a certain level of quality and liquidity in the security. »  
Experts’opinions  
[
3097] Vance opined the Legal for Life Certificates contained errors and were materially  
3341  
.
misleading  
[
3098] As he explained, with respect to the misleading nature of the 1988 certificate,  
Castor would not have met the required tests for Legal for Life Status had the audited  
3
342  
The Legal for Life  
financial statements reflected the required loan loss provisions.  
Certificates were all based on compliance with specific tests over a five year period  
which depended on the results in the audited financial statements and subsequent  
calculations.  
[
3099] Lowenstein explained Legal for Life Opinions was a validation that the company  
had had a strong five year record, sufficiently strong that the company's securities would  
3
343  
qualify as an investment for major financial institutions , a validation of the financial  
health of Castor.3  
344  
[
3100] Because the certificates are prepared for the very purpose of being relied upon  
for investment decisions, particularly by investors that require safe investments, their  
preparation, according to Plaintiff’s expert Lowenstein, required «the same level of care  
3
338  
PW-1053-6, seq. p. 103  
3
339  
PW-1420-1B: “the tests set out in the act to determine the eligibility of corporate securities are lengthy  
and complex and present a number of difficulties of interpretation.”  
3
340  
PW1420-1B, TPS-A-405  
3
341  
Vance, March 5, 2008  
3
342  
Vance, March 5, 2008, p. 101  
Lowenstein, March 21, 2005, p.153  
Lowenstein, March 21, 2005, p.155, 159, 163  
3
343  
344  
3
500-05-001686-946  
PAGE: 637  
that an auditor is expected to exercise in signing an opinion letter of financial  
statements».3  
345  
Conclusions  
[
3101] The Court has judicial notice of the various statutes mentioned in the Legal for  
3346  
.
Life Opinions of McCarthy Tétrault  
•
Those statutes are either federal legislation, Quebec legislation or legislation  
from various other Canadian provinces;  
•
From the proceedings, it was obvious the Legal for Life Certificates were at  
issue as well as C&L’s work relating thereto. Defendants knew it and cannot  
seriously argue they would have been caught by surprise;  
•
Article 2809 of the CCQ applies.  
[
3102] The misstatements in the Legal for Life Opinions were the direct consequence of  
the misstatements in the certificates provided by Defendants.  
[
3103] Castor’s Legal for Life Status accomplished the goal of indicating the credit  
worthiness of Castor and the quality of an investment in Castor.  
[
3104] It was reasonably foreseeable to C&L that third parties would rely on this status  
as indicating «a certain level of quality and liquidity» because same is explicitly foreseen  
3
347  
Indeed, this was the purpose  
in C&L’s internal policy on Legal for Life certification.  
of obtaining Legal for Life Status.  
[
3105] The mistakes made in the audits of Castor’s financial statements were repeated  
when the auditors mechanically produced the Legal for Life Certificates. This resulted in  
C&L negligently representing that Castor had passed the required tests and was worthy  
of Legal for Life Status, when it should not have been.  
3
345  
Lowenstein, March 21, 2005, p. 159, lines 19 to 21  
Article 2809 CCQ  
3
346  
3
347  
PW-1420-1B, TPS-A-405  
500-05-001686-946  
PAGE: 638  
Reliance issue  
Positions in a nutshell  
Plaintiff  
[
3106] Plaintiff explains the initial deposit of Widdrington ($200,000) was a short-term  
deposit to retain high liquidity. Although, submit Plaintiff, it is correct to say that  
Widdrington relied in part on his confidence in Stolzenberg in making this initial deposit,  
nevertheless Widdrington did do other due diligence. The nature of this deposit of  
$
200,000 was entirely different from the following investments.  
[
3107] Plaintiff submit that Widdrington’s investments were long-term major  
investments, that Widdrington proceeded to a far more extensive due diligence and that  
respected and well known experts who did review it concluded that it was a due  
diligence more than appropriate in the circumstances.  
[
3108] Plaintiff says unqualified audit reports and audited financial statements, share  
valuation letters, and Legal for Life Certificates were determinative of Widdrington's  
decisions to make his investments in Castor. Plaintiff highlights every business presents  
risks but very few have a track record similar to Castor’s based on more than 10 years  
of clean audit reports, audited financial statements and valuation letters showing what  
3349  
expert witnesses have described as outstanding” , “highly impressive”,  
3
348  
spectacular”3 , and even “magnifique” results.  
3351  
350  
“
[
3109] Reasonably, exit ability was not perceived by Widdrington as a deterrent to make  
his investments; in their valuation letters, C&L had assessed the market ability and  
expressed the opinion there were sufficient shareholders to create a market should  
exiting become necessary.  
[
3110] Finally, Plaintiff concludes that Widdrington did what he had to do as a director of  
Castor from the day he became a director, in March 1990, until the end.  
Defendants  
[
3111] Defendants submit the determinative reason why Widdrington made his  
investments in Castor was not his reliance upon C&L’s representations. Other factors,  
3
348  
349  
Lowenstein, March 21, 2005, page 137, line 25  
3
Morrison, October 10, 2006, pp. 218-220, (at p. 220 lines 22 to 25); Morrison, October 11, 2006, pp.  
9
-21, at pp. 14-16  
3
350  
351  
PW-2405, pp. 6-7  
3
Lajoie, November 19, 2009, pp. 128-131 (at p. 131, line 5)  
500-05-001686-946  
PAGE: 639  
the most important of which were Stolzenberg’s strong personal influence on  
Widdrington and the latter’s eagerness to develop a close relationship with Stolzenberg  
and become a director of Castor, played the leading role in his investment decisions, to  
the point of relegating C&L’s representations to a simple after the fact pretext.  
[
3112] Defendants submit that Widdrington was a very sophisticated investor, from  
whom a high standard of prudence and care would have been expected. Acting against  
the better advice of his team of advisors, Defendants argue Widdrington behaved  
recklessly and did not complete a reasonable due diligence prior to making his  
investments in Castor.  
[
3113] Defendants plead that it is not reasonable for Widdrington to allege having relied  
on C&L’s representations in those circumstances. According to Defendants, numerous  
contradictions in Widdrington’s testimony, and the rather strange explanations he  
offered on certain key elements, should totally discredit his testimony as to this alleged  
reliance.  
[
3114] Defendants add that when Widdrington became a director of Castor he had  
duties to discharge which, had he discharged them, would have allowed him to be  
provided with information his advisors had repeatedly asked for in their due diligence  
process but never received.  
[
3115] Finally, Defendants conclude that Widdrington has only himself to blame for his  
loss.  
Additional evidence  
[
3116] Before reviewing the additional evidence relating to the reliance issue, the Court  
finds it useful, through a further “who’s who section”, to introduce lay witnesses and  
expert witnesses who testified mainly on this issue: Widdrington, Heinz Prikopa  
(
“Prikopa”), George Taylor (“Taylor”), Fred Fitzsimmons (“Fitzsimmons”), Paul J.  
Lowenstein (“Lowenstein”), Stephen A. Jarislowsky (“Jarislowsky), Donald C.  
Morrison (“Morrison”) and Alain Lajoie (“Lajoie”).  
[
3117] The Court will also introduce Bill Wood (“Wood”) who did not testify before this  
Court but was consulted by Widdrington before he made his investments in Castor.  
500-05-001686-946  
PAGE: 640  
Who’s who  
Widdrington  
[
3118] In 1953, Widdrington obtained his Undergraduate Degree in Economics with  
honours from Queen’s University. In 1955, Widdrington obtained a Master’s degree in  
3
352  
.
Business Administration from the Harvard Business School  
3119] Widdrington started as a salesman at Labatt in 1955  
3
353  
[
and occupied various  
positions throughout the years: regional manager, general manager and senior vice-  
president3  
354  
.
[
3120] In 1972, Widdrington was named Vice-President, Corporate Development of  
John Labatt Limited (“Labatt”). In 1973, he was named President and Chief executive  
officer, positions he held until 1989. He was also Chairman of Labatt’s board from 1987  
to 1991. During his 16-year tenure, Widdrington was responsible for leading Labatt’s  
very aggressive and highly successful expansion through the acquisition of numerous  
other companies.  
[
3121] Given the numerous acquisitions made by Labatt throughout his tenure,  
Widdrington had a good understanding of financial statements as well as a strong ability  
to evaluate a wide variety of business situations and investment opportunities. He was  
3
355  
.
also familiar with prudent investment due diligence procedures  
[
3122] As shown in annual reports of Labatt, from 1980 to 19893356  
:
•
Widdrington personally signed Labatt’s financial statements in his capacity of  
director of the company; and  
•
From 1981 to 1987, Widdrington was a member of Labatt’s audit committee3357  
.
[
3123] Widdrington’s experience on Labatt’s audit committee provided him with first-  
hand experience working with auditors in connection with the audit of financial  
statements.  
[
3124] Widdrington’s exposure to business and finance was not limited to his key roles  
3358  
.
at Labatt  
3352  
3353  
3354  
3355  
3356  
3357  
3358  
PW-12-1  
Widdrington, November 29, 2004. p.72  
PW-12-1; Widdrington, November 29, 2004  
Widdrington, December 13, 2004  
D-590-80 to D-590-89  
D-590-85, at page 31  
PW-12 and Widdrington, November 29, 2004  
500-05-001686-946  
PAGE: 641  
[
3125] Widdrington was a member of the board of no less than 20 companies during his  
career, which included the Canadian Imperial Bank of Commerce (1986-2001), Canada  
Trust Co Mortgage Company (1977-1986), Olympic Trust of Canada (1983-1999),  
Huron & Erie Mortgage Corporation, Toronto Blue Jays Baseball Club (1991-1996),  
Brascan (1979-1994) and the SNC-Lavalin Group Inc. (1991-1999).  
P rikopa  
[
3126] From 1962 to 1966, Prikopa was employed as a general accounting clerk at John  
3359  
.
Leckie Industries, a company in marine supplies  
[
3127] From 1966 to 1971, Prikopa completed studies to become a certified  
3360  
.
management accountant  
[
3128] From 1966 to 1968, Prikopa was employed at McCurdy Radio Industries in  
3361  
.
Toronto as a Cost Accountant  
[
3129] From 1968 to 1970, Prikopa was Assistant Controller for Remington Rand, a  
3362  
.
division of Sperry Rand at the time, in Toronto  
[
3130] In 1970, Prikopa joined Labatt where he was employed for a total period of  
3363  
.
approximately 21 years  
•
•
•
He started in 1970 with the Laura Secord Division, which was a division of  
Labatt, in the capacity of Budget Manager. He then became National Planning  
Manager and Division Controller, a position he occupied until 1978.  
In 1978, he moved on to the Labatt corporate office in London, Ontario, first in  
the position of Assistant Corporate Controller, from 1978 to 1979, then as  
Corporate Controller until the end of 1982.  
From 1982 until the fall of 1991, when he left Labatt, he occupied different  
financial positions as Manager, Pensions Fund Investments and Investor  
Relations.  
[
3131] From 1971 to 1976, on a part time basis, Prikopa completed a B.A. in economics  
3364  
.
and sociology at York University  
3359  
3360  
3361  
3362  
3363  
3364  
Prikopa, December 4, 1997, pp.9-12; PW-2389  
Prikopa, December 4, 1997, pp.9-12; January 12, 2005, pp. 13-15; PW-2389  
Prikopa, December 4, 1997, pp.9-12; PW-2389  
Prikopa, December 4, 1997, pp.9-12; PW-2389  
Prikopa, December 4, 1997, pp. 9-10; January 12, 2005, pp. 19 and following and PW-2389  
Prikopa, December 4, 1997, pp.9-12; January 12, 2005, p.10-11; PW-2389  
500-05-001686-946  
PAGE: 642  
[
3132] In 1981, Prikopa took the executive management course at the University of  
3365  
.
Western Ontario, an intensive course that lasted six whole weeks  
[
3133] In 1985, Prikopa started studying to become a Chartered Financial Analyst, but  
3366  
.
he stopped after the first year of studies and did not complete the second and third  
[
3134] During his career, Prikopa was a member of various professional associations  
3367  
.
and he sat on numerous committees  
[
3135] In 1984 or 1985, Labatt’s Chairman, Peter Hardy, suggested that Widdrington  
3368  
.
deal with Prikopa for his personal financial matters  
[
3136] Prikopa provided Widdrington with written reports on material Widdrington would  
3369  
.
receive that involved tax matters, investments and boards of directors’ books  
[
3137] According to Widdrington, Prikopa was invaluable for keeping track of his  
personal affairs and he trusted him. While Prikopa worked for Labatt, Widdrington did  
not pay him for services. When Prikopa left Labatt in 1991, Widdrington paid him  
$
1,000.00/month and charged the invoices back to Labatt. When Widdrington testified  
at trial before Justice Carrière, in 2004, Prikopa was still handling his personal affairs for  
remuneration3  
370  
.
[
3138] In 1997, when he testified on discovery, Prikopa was currently employed as  
Director, Pensions and Risk Management, by Gulf Canada Resources in Calgary,  
where he worked until 20023  
371  
.
T aylor  
[
3139] Taylor left school very early, before completing high school, and went to work for  
3372  
.
a trustee in bankruptcy, a small firm in Chatham, Ontario  
[
3140] Through correspondence, Taylor completed high school. He had planned to  
study to become a Chartered Accountant but he did not follow his plan. By the time he  
finished high school, he had a family and had to find a job that provided more  
remuneration3  
373  
.
3365  
3366  
3367  
3368  
3369  
3370  
3371  
3372  
3373  
Prikopa, December 4, 1997, pp.9-12; January 1, 2005, p. 14; PW-2389  
Prikopa, December 4, 1997, pp.9-12 ; January 12, 2005, p. 16; PW-2389  
Prikopa, January 12, 2005, pp. 16 and following  
Prikopa, December 4, 1997,pp.9-12  
Prikopa, December 4, 1997, pp.9-12  
Widdrington, November 29, 2004  
Prikopa, December 4, 1997; Prikopa, January 12, 2005, pp. 18-19  
Taylor, January 20, 2005, pp. 9-13  
Taylor, January 20, 2005, pp. 9-13  
500-05-001686-946  
PAGE: 643  
[
3141] In 1960, Taylor started working at Labatt in a junior accounting capacity, and  
studied at night for his RIA designation (Registered Industrial Accountant), that he  
obtained in 1965, which subsequently became a CMA designation (Certified  
Management Accountant)3  
374  
.
[
3142] Taylor took a number of university courses in Vancouver, at the University of  
British Columbia, and also at the University of Western Ontario. A few years later,  
Taylor completed the Management Development program at the University of Western  
Ontario and subsequently, he took the Management Development program at Harvard  
Business School3  
375  
.
[
3143] While he does not have a formal degree, Taylor spent a considerable amount of  
3376  
.
time studying the subjects associated with his profession  
[
3144] Taylor was promoted several times over the years, becoming Vice-President  
Finance of the Labatt’s parent company in 1977, then Executive Vice-President, in  
3
377  
.
1
984, and finally Labatt’s Chief Executive Officer  
[
3145] Taylor has been on a number of commercial boards and non-profit organization  
boards. In each case, without exception, Taylor sat on the audit committees and most  
3
378  
.
frequently chaired the audit committees, although not exclusively  
[
3146] During the 80s, Taylor was already tremendously experienced in analyzing  
financial statements: the preparation of financial statements that he would be  
responsible for, and the financial statements that he would review in due diligence  
3
379  
activities or in the perspective of becoming more knowledgeable about a competitor.  
[
3147] During the 80s, Taylor was the principal individual who interacted with the  
auditors of Labatt. Taylor dealt with the planning of the audit, the administration of the  
audit from the corporation's perspective, and he had discussions with the auditors on an  
innumerable number of tax matters and accounting matters, disclosure issues and other  
matters3  
380  
.
[
3148] According to Widdrington, Taylor was honest, resourceful, smart and  
3381  
trustworthy . Widdrington and Taylor’s relationship was not a friendship as such but  
3
382  
rather a very close relationship between business associates  
.
3374  
3375  
3376  
3377  
3378  
3379  
3380  
3381  
3382  
Taylor, January 20, 2005, pp. 9-13  
Taylor, January 20, 2005, pp.9-13  
Taylor, January 20, 2005, pp.9-13  
Taylor, January 20, 2005, pp.13 and following  
Taylor, January 20, 2005, p. 21  
Taylor, January 20, 2005, p. 27  
Taylor, January 20, 2005, p. 27  
Widdrington, November 29, 2004  
Taylor, January 20, 2005, p. 35  
500-05-001686-946  
PAGE: 644  
F itzsimmons  
[
3149] Fitzsimmons was an employee of Price Waterhouse Coopers. One of his duties,  
in that capacity, was to do forensic accounting or investigation of issues identified by  
Heenan Blaikie in relation to the present litigation. From 1992 to 1998, Fitzsimmons  
3
383  
.
devoted most of his time to that mandate  
[
3150] Acting on behalf of C&L, Fitzsimmons met with many of the persons who testified  
in this case and with many others whose names have been mentioned even though  
they did not testify.  
[
3151] Taylor is one of those persons with whom Fitzsimmons met in 1998.  
L owenstein  
[
3152] Lowenstein holds the following degrees and designation: Bachelor of Arts from  
McGill University, Master’s degree in Business Administration from the University of  
Michigan, and Chartered Accountant designation from the Institute of Chartered  
Accountants of Quebec.3  
384  
[
3153] From 1965 to 1969, Lowenstein worked for Edper Investments Ltd. (“Edper”),  
the trust set up for the family of Edward and Peter Bronfman, the children of Allan  
3
385  
.
Bronfman, the brother of Sam Bronfman  
[
3154] Edper was known as one of the sources of capital for both public and private  
companies. At the time, it was a firm that had approximately $100,000,000 in assets,  
which was significant in the early 60s. Edper would be constantly approached with  
3
386  
.
investments opportunities, both for public and private companies  
[
3155] From 1969 to 1980, Lowenstein was President of Kauser, Lowenstein & Meade  
Ltd. Lowenstein was co-founder of that firm with Messrs.’ Ronald Meade and Stephen  
Kauser and they were later joined by a fourth partner named Eric Baker. They acted as  
an advisor to private family groups and institutional investors on investments that they  
had made. They were a bridge between the entrepreneurial community and the  
investment community. They worked for some sophisticated family groups such as the  
Steinberg family and the Cummings family; they worked for several high net worth  
investor groups3  
387  
.
3383  
3384  
3385  
3386  
3387  
Fitzsimmons, January 23, 2006, pp. 22-23  
PW-2403  
Lowenstein, March 21, 2005, p. 11  
Lowenstein, March 21, 2005, p. 15  
Lowenstein, March 21, 2005, pp. 15 and following  
500-05-001686-946  
PAGE: 645  
[
3156] Analyzing the investment opportunities made available by private companies, as  
3388  
.
opposed to public companies, represents the bulk of Lowenstein’s career  
[
3157] Lowenstein never met Widdrington.  
J arislowsky  
[
3158] Jarislowsky graduated in engineering from the University of Cornell in Ithaca,  
New York, in 1944.  
[
3159] From there, he entered the American army and studied Japanese with the army  
for nine months. He came back and took a Master's degree in Far Eastern culture at the  
University of Chicago.  
[
3160] He went on to Harvard Business School and, in 1949, he got his Master’s degree  
with distinction.  
[
3161] In the 50s, he started teaching investment analysis at McGill University and was  
still teaching investment analysis, in various universities, when he testified in 2005.  
[
3162] In 1955, he formed Jarislowsky, Fraser & Company. In 2005, he still was the  
CEO and Chairman of the company which was about to celebrate its 50th anniversary.  
[
3163] Jarislowsky, Fraser & Company are investment counsel for private and  
institutional accounts and they have grown from a firm managing a hundred dollar  
investment (in 1955) to a firm managing 50 billion dollars of investment funds (in  
3389  
005) . Jarislowsky, Fraser & Company attracts clientele from Canada and abroad,  
3390  
.
2
mainly represented by pension funds, endowment funds and private individuals  
[
3164] Jarislowsky was the chief security analyst of Jarislowsky, Fraser & Company for  
about 40 years. He visited about a hundred companies or more a year, especially in  
Canada, and knew the executives of many of them.  
[
3165] Over the years, Jarislowsky investigated financial statements of large public  
companies and also of private companies which he got involved in. Jarislowsky was a  
board member of approximately ten private companies (as a director). As such, he had  
to analyze financial statements and to make sure that the executives operated within  
the guidelines of the Board3  
391  
.
3388  
3389  
3390  
3391  
Lowenstein, March 21, 2005, p. 23 (line 17)  
Jarislowsky, April 4, 2005, p.15  
Jarislowsky, April 4, 2005, p.15  
Jarislowsky, April 4, 2005, p.17  
500-05-001686-946  
PAGE: 646  
[
3166] Over the years, Jarislowsky was on the audit committee of various organisations,  
namely SNC-Lavalin, Goodfellow Inc., Swiss Bank Corporation and Daily Telegraph of  
London3  
392  
.
[
3167] Jarislowsky has seven honorary degrees, doctorates, from Canadian  
3
393  
universities . He has received many honours and distinctions.  
[
3168] In 2005, 50-60% of Jarislowsky’s personal net worth was still associated with  
3394  
.
Jarislowsky, Fraser & Company  
[
3169] For a period of time, both Jarislowsky and Widdrington were directors of SNC-  
Lavalin.  
M orrison  
[
3170] From 1959 to 1964, Morrison trained as a Chartered Accountant with Deloitte  
Haskins & Sells in Toronto.  
[
3171] Morrison became a Chartered Accountant in 19623395 and obtained his diploma  
in finance and accounting the same year, from Western Business School.  
[
3172] From 1964 to 1972, Morrison worked for the Royal Bank of Canada, in Montreal  
and Toronto, where he occupied various positions dealing with credit and financial  
analysis, acquisitions and due diligence.  
[
3173] In 1972, Morrison joined the Canada Development Corporation (“CDC”), where  
he was initially Chief Financial Officer, then Executive Vice-President and finally number  
3
396  
two operating officer for four years . Financial analysis and due diligence for  
investment purposes were essentially at the core of everything he did during those  
years.  
[
3174] From 1976 to 1979, Morrison worked at Burns Fry, an upper medium size  
investment firm, where he was a major shareholder and a senior officer. His primary  
function was to be a Director of Corporate Services and his responsibilities included  
again financial analysis and due diligence for investment purposes, and most  
3
397  
.
particularly in private companies  
3
392  
393  
Jarislowsky, April 4, 2005, pp.18-19  
3
Laval University, University of Montreal, Queens University, Windsor, McMaster, University of Alberta,  
and Concordia.  
3394  
3395  
3396  
3397  
Jarislowsky, April 4, 2005, p.19  
Morrison, October 3, 2006, p. 15  
Morrison, October 3, 2006, p. 36  
Morrison, October 3, 2006, pp. 44-47  
500-05-001686-946  
PAGE: 647  
[
3175] From early 1979 to early 1980, Morrison was Senior Vice- President and head of  
the Bank of Nova Scotia's Corporate Banking Division, but moving there had been a  
mistake. He gracefully resigned and they parted company on a mutually acceptable  
basis.  
[
3176] He took a sabbatical year. Things developed meanwhile and thereafter, he  
decided to continue on his own. Morrison accepted a Visiting Professorship for a year at  
the York University Graduate Business School. He worked on development of an  
Executive M.B.A. program there and taught a final term M.B.A. course in business  
strategy and policy. He was asked to sit on boards of private companies and was  
approached increasingly to do general consulting work. Morrison participated, on his  
3
398  
.
behalf or on behalf of other investors, in a number of private investments  
[
3177] Morrison started in 1983 to spend more time doing litigation support. Before he  
filed a report in the Widdrington case, Morrison had never filed an expert report on due  
3
399  
.
diligence required of a private investor  
[
3178] Morrison has generally been regarded as an expert in banking and the majority  
3400  
.
of projects he has worked on dealt primarily with banking  
[
3179] Morrison knew Widdrington : “I knew him personally. I did business with him on  
one occasion, or we had business discussions. (…) In the late 1980s he was one of  
3
401  
.
Canada's premier CEOs and I had the highest regard for him”  
L ajoie  
[
3180] Lajoie became a Chartered Accountant in 19783402  
.
[
3181] Lajoie holds a M.B.A. degree from the University of Western Ontario that he  
3403  
.
received in 1983  
[
3182] Lajoie joined the firm Arthur Andersen, which he left in 19863404  
.
[
3183] Except for Leclerc Juricomptables, his professional society, Lajoie has no  
investment in private corporations. All of his personal investments are in public  
corporations and were made through a specialized broker who is handling them on his  
behalf3  
405  
.
3398  
3399  
3400  
3401  
3402  
3403  
3404  
3405  
Morrison, October 3, 2006, pp.51-54  
Morrison, October 3, 2006, pp. 89-92, 105  
Morrison, October 3, 2006, p.105  
Morrison, October 3, 2006, p. 94  
Lajoie, October 16, 2006, p. 16  
Lajoie, October 16, 2006, p. 20  
Lajoie, October 16, 2006, pp. 22 and following  
Lajoie, October 16, 2006, p. 54  
500-05-001686-946  
PAGE: 648  
Wood  
[3184] At all relevant times, Bill Wood, a chartered accountant, was the Ernst & Young  
engagement partner on the Labatt audit. Widdrington relied on him for his personal tax  
and financial planning, not only for himself but also for his wife and daughter. Wood also  
provided advice on personal investment matters. Widdrington did not personally pay  
Wood for his services: Wood’s fees were assumed by Labatt. From 1995 to 2004, after  
Widdrington left Labatt, Labatt continued to pay Wood for the services rendered to  
Widdrington.3  
406  
Widdrington and Stolzenberg’s First Encounter –  
[
3185] Widdrington met Stolzenberg for the first time at the Davos Symposium in  
January 1986. At the same symposium, Widdrington also met James Binch (“Binch”) of  
Trinity.  
[
3186] When Widdrington first met Binch, they hit it off right away because they had a  
3407  
lot in common and they became friends . This led Widdrington to become a director  
of Trinity in 1987, where Stolzenberg was also involved as a director.  
[
3187] Widdrington felt Stolzenberg was “very smart” and “a great salesman” with a  
3408  
.
strong ability to “work the room”  
1
986  
[
3188] Following his first encounter with Stolzenberg in January 1986, Widdrington met  
3409  
.
with him for lunch or dinner, namely on July 22, 1986  
[
3189] Widdrington arranged for Taylor to meet Stolzenberg to discuss the possibility of  
3410  
Labatt’s Pension Funds investing in Castor . This meeting took place in August 1986  
over lunch at Labatt’s offices. Stolzenberg made a presentation on Castor, discussed  
business strategy and performance and provided Taylor with Castor’s financial  
statements. At the conclusion of the meeting, Taylor turned the package over to Prikopa  
for his review.  
[
3190] Taylor had a favourable opinion of Stolzenberg but, nevertheless, Labatt’s  
Pension Funds did not invest in Castor since it would have requested a very  
fundamental change in policy. Labatt’s policy required that the pension funds be  
3406  
3407  
3408  
3409  
3410  
Widdrington, November 29, 2004  
Widdrington, December 14, 2004  
Widdrington, December 14, 2004  
Widdrington, December 14, 2004 and D-593  
Widdrington, December 14, 2004, pp. 109 and following  
500-05-001686-946  
PAGE: 649  
managed through third-party managers, and that no decisions on individual investments  
be made internally3  
411  
.
1
987  
[
3191] When he attended monthly meetings at CIBC, Widdrington would enquire about  
Castor with someone in the financial area. The news and comments were always fairly  
positive or positive.  
[
3192] On January 21, 1987, Martin Dufresne, Senior Vice-President, Corporate  
Banking at CIBC, called Widdrington and further sent him a fax, in which he confirmed  
that Castor was a very legitimate company, with a very legitimate business  
approach.3  
412  
[
3193] In December 1987, Simon met with Ms. Diana Brett, Account Manager with the  
CIBC in Montreal and sent her financial information for purposes of obtaining a credit  
3
413  
facility for Castor . Subsequent to December 1987, the CIBC submitted a proposed  
term sheet outlining the main conditions of a line of credit that it was prepared to extend  
to Castor. After reviewing the term sheet, and discussing it with Stolzenberg, Castor felt  
that the CIBC was imposing certain conditions they would not agree to comply with,  
3
414  
.
therefore Castor did not accept CIBC’s offer  
[
3194] The main conditions found unacceptable by Castor were essentially that the  
CIBC wanted a fully secured line of credit and wanted to see information on the  
3
415  
.
mortgage portfolio which went beyond what Castor was prepared to provide  
3195] Widdrington did not know Diana Brett or her colleague Brian Perron3416 and he  
[
was never made aware of any meetings or dealings between the CIBC and Simon.  
3
417  
[
3196] In a letter dated August 25, 1987 , Widdrington invited Stolzenberg to attend  
Labatt’s annual meeting of September 11 and 12, 1987. Taylor confirmed that this was  
3
418  
.
an internal Labatt function with very few outsiders, if any, invited as special guests  
3
419  
.
In fact, Stolzenberg was the only outsider invited at this Labatt function  
3411  
3412  
3413  
3414  
3415  
3416  
3417  
3418  
3419  
Taylor, January 20, 2005, pp. 27-30  
PW-2377  
Simon, April 28, 2009, pp.130-134; D-620-1 and D-620-2  
Simon, April 28, 2009, pp.133-134  
Simon, April 28, 2009, pp. 152-153  
D-620-1  
D-618  
Taylor, January 20, 2005, pp. 120-122  
Widdrington, December 15, 2004  
500-05-001686-946  
PAGE: 650  
1
988  
[
3197] During 1988, Widdrington would have had meetings and other contacts with  
Stolzenberg:  
•
•
According to Stolzenberg’s agenda, Stolzenberg and Widdrington had a lunch  
3420  
meeting on January 6, 1988 at the Toronto Yacht Club but Widdrington did  
not recall this meeting3  
421  
;
According to a letter, Widdrington was invited to Castor’s board of directors’  
3
422  
dinner on March 21, 1988 , but Widdrington did not recall whether or not he  
attended this particular meeting. Widdrington however stated that he did attend  
3
423  
;
one board dinner prior to becoming a director of Castor  
•
•
•
Widdrington had lunches or dinners, three or four times with Stolzenberg;  
Widdrington considered Stolzenberg was an interesting individual with a good  
sense of humour3  
424  
;
On June 27, 1988, Widdrington invited Stolzenberg to attend the opening night of  
the Stratford Festival, in Ontario, for purposes of introducing him to Mr. Merv  
Lahn of Canada Trust3  
425  
;
On August 15, 1988, Widdrington invited Stolzenberg to attend Labatt’s’ Annual  
3
426  
.
Meeting on September 7-8, 1988  
T he 1988 deposit of $200,000  
[
3198] On their way to Connecticut to a Trinity board meeting aboard Stolzenberg’s  
private jet, Widdrington asked Stolzenberg if he could find a short-term investment  
vehicle for him.  
3427  
3199] Widdrington had received positive feedback on Castor from CIBC’s officials  
3428  
[
confirmed in writing by Dufresne, a Vice-president of the CIBC . Moreover, Taylor  
was impressed with Castor’s solid track record and was of the opinion that a three-  
month deposit would not involve any sort of risk for Widdrington.  
3420  
3421  
3422  
3423  
3424  
3425  
3426  
3427  
3428  
D-621  
Widdrington, December 15, 2004  
D-622  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004; D-625-1 and D-625-2  
D-626; Widdrington, December 15, 2004, pp. 315-317  
Widdrington, November 29, 2004  
PW-2377  
500-05-001686-946  
PAGE: 651  
[
3200] On October 11, 1988, Widdrington sent Stolzenberg a cheque in the amount of  
3
429  
in connection with a term deposit in the same amount  
$
200,000 payable to Castor  
3
430  
for a three-month period extending from October 12, 1988 to January 12, 1989.  
[
3201] Widdrington’s deposit in Castor was evidenced by a very short letter, PW-34, that  
Widdrington addressed to Stolzenberg on October 11, 1988, which reads in part as  
follows3  
431  
:
Dear Wolfgang:  
As per our discussion of last week, enclosed please find my cheque in the  
amount of $200,000.  
Once you have had an opportunity to do so, for my own record keeping  
purposes, I would appreciate it if you would let me know how the money is being  
invested.”  
[
3202] Widdrington did not have precise knowledge as to how his money was going to  
3
432  
and he had not seen financial statements or other specific financial  
be invested  
3
433  
.
information regarding Castor prior to making this $200,000 deposit  
[
3203] As it turned out, this first deposit consisted of a promissory note issued by Castor  
which was thereafter renewed from time to time and eventually rolled into Widdrington’s  
equity investment in Castor in December 1989.  
1
989  
[
3204] Widdrington continued to have informal meetings and other contacts with  
Stolzenberg.  
T he 1989 investment  
[
3205] On December 13, 1989, Widdrington met with Stolzenberg at The York Club in  
Toronto where the latter approached him to become a director of Castor and to invest  
3
434  
approximately $1,000,000 in the company . At this lunch meeting, Widdrington was  
provided with the following documents by Stolzenberg:  
3429  
3430  
3431  
3432  
3433  
3434  
PW-34  
PW-35  
PW-34  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, November 29, 2004  
500-05-001686-946  
PAGE: 652  
•
a letter dated December 12, 1989 inviting him to invest in units consisting of a  
3
435  
with the following attached  
mixture of shares and debentures of Castor  
documents: interim financial statements as at September 30, 1989; a five year  
forecast; a valuation letter from C&L dated October 17, 1989 regarding the fair  
market value of Castor’s common shares; a schedule of Shareholders’ Positions  
st  
as at December 1 ; a schedule of 1989 Capital Increase; a letter showing  
subscription details and a subscription form.  
•
•
•
Castor’s Audited Consolidated financial statements for the year ended December  
1, 19883  
436  
;
3
Castor’s consolidated financial statements for the five years ended December 31,  
437  
;
1
9883  
The list of senior management and board members of Castor3438  
.
[
3206] The package did neither include a Legal for Life Opinion nor a Legal for Life  
Certificate issued by C&L.  
[
3207] Stolzenberg told Widdrington Castor needed some Canadian directors to sit on  
its board and he specified that the requirement to become a director was to make, at  
3
439  
least, a million dollar investment in the company.  
3208] Following his December 13, 1989 lunch with Stolzenberg, Widdrington did a  
[
cursory review of the package of documents received and thereafter handed the  
package to Prikopa3  
440  
.
[
3209] On December 14, 1989, Prikopa reviewed the documentation3441 a copy of  
which was also given to Wood.  
[
3210] On December 14, 1989, in the afternoon, Widdrington met with Prikopa to obtain  
3442  
.
his preliminary reaction  
[
3211] Prikopa viewed that his role which was to look at the materials from a financial  
point of view, would provide a second independent view on the merits of a $1,000,000  
investment3  
443  
.
3435  
3436  
3437  
3438  
3439  
3440  
3441  
3442  
3443  
PW-10  
PW-10-1  
PW-10-2  
PW-10-3  
Widdrington, November 29, 2004  
Widdrington, December 16, 2004  
Prikopa, January 12, 2005, p. 45-46  
Widdrington, November 30, 2004, p. 12  
Prikopa, January 12, 2005, p. 92  
500-05-001686-946  
PAGE: 653  
[
3212] Prikopa learned that the annual director fees would be $30 000, which appeared  
3444  
.
to be a normal size fee  
[
3213] From his analysis of the available material, Prikopa identified that:  
•
•
The invitation to Widdrington to become a director and shareholder was not  
an off invitation to make an investment but rather a part of a $25,000,000  
3
445  
;
capital offering by Castor to existing stake holders and any new investors  
C&L had issued a valuation letter of Castor’s common shares dated October  
3446  
7, 1989 ; the valuation letter provided a good degree of comfort to  
1
Prikopa. In order to have an understanding of where the company was and in  
order to be able to express an opinion on the valuation of the common  
shares, he was looking at updated results, right up to the date of the  
proposed investment, through a valuation report from the company's  
3
447  
auditors , with the audit work done by C&L, as well as the review by C&L of  
the interim results of Castor. Prikopa could not wish for better and more  
3
448  
reliable information . Moreover, the content of the valuation letter, over and  
above the value itself, was extremely positive and comforting (a strong  
3
449  
.
endorsement by the auditors)  
•
•
the key highlights of the audited financial statements for the last completed  
year were : a clean unqualified audit opinion from C&L, one of the big five  
3
450  
accounting firms for which he had a lot of respect ; a very sizeable growth  
3
451  
in the asset base ; an ability to raise substantial funds on the liability  
3
452  
3453  
side ; a very strong growth on the net earnings side ; short-term  
commitments by Castor and a reasonably good maturity matching between  
assets and liability3  
454  
;
the five-year consolidated audited financial statements ending December 31,  
1
988 showed: a very, very strong growth record over this five-year period on  
3455  
a solid consistent basis one year after the next ; a significant growth of  
bank lendings to Castor which showed the ability of Castor to manage these  
3444  
3445  
3446  
3447  
3448  
3449  
3450  
3451  
3452  
3453  
3454  
3455  
Prikopa, January 12, 2005, p. 94-96  
Prikopa, January 12, 2005, p. 98  
Prikopa, January 12, 2005, p.102  
Prikopa, January 12, 2005, p. 102, pp.148 and following  
Prikopa, January 12, 2005, pp. 151 and following  
Prikopa, January 12, 2005, pp. 151 and following  
Prikopa, January 12, 2005, p. 106  
Prikopa, January 12, 2005, p. 108-112  
Prikopa, January 12, 2005, p. 112  
Prikopa, January 12, 2005, p. 112  
Prikopa, January 12, 2005, pp. 114-125  
Prikopa, January 12, 2005, pp.128-130  
500-05-001686-946  
PAGE: 654  
3
456  
monies and provide a fair rate of return to its lenders ; a very solid balance  
3
457  
sheet situation with a fairly good shareholders' equity position ; leverage  
consistent with normal leverage of the industry, not over-extended but at the  
3
458  
same time good enough to provide good returns ; a very positive earnings  
growth in a time frame where there was volatility in the markets and interests  
rates which showed that management group was able to manage this  
3
459  
.
business and were doing a very successful job  
•
•
The unaudited financial statements for a 9 month period ending September  
3460  
0, 1989 showed same progress still apparent in the current year .  
3
The Castor history document provided information from Castor’s inception  
and up to September 30, 1989 – a very positive performance history since  
every year showed positive growth of quite a substantial size notwithstanding  
3
461  
.
the challenging situation of the early 80s  
•
The list of management and directors showed a solid and diversified group  
3462  
.
with good credentials  
3214] Prikopa’s impressions were “very, very strong positive impressions”3463  
3215] Prikopa prepared a hand-written memo for Widdrington and gave a copy to  
[
[
.
3
464  
Wood . Widdrington suggested to Wood and Prikopa that they call Stolzenberg the  
3
465  
.
next day in order to get answers to any questions they might have  
[
3216] On December 15, 1989, in the afternoon, Stolzenberg, Wood and Prikopa  
participated in a telephone conference call. During this call, they discussed various  
issues, including Castor’s portfolio diversification and shareholders’ exit options.  
Stolzenberg undertook to provide a copy of the shareholders’ agreement to Prikopa.  
3
466  
.
The call lasted approximately 15 to 20 minutes  
[
[
3217] Following this call, Prikopa finalized his memo to Widdrington3467  
3218] In his memo, Prikopa dealt with risk factors and possible concerns as follows:  
.
3456  
3457  
3458  
3459  
3460  
3461  
3462  
3463  
3464  
3465  
3466  
3467  
Prikopa, January 12, 2005, p. 129-131  
Prikopa, January 12, 2005, p. 131  
Prikopa, January 12, 2005, p. 133  
Prikopa, January 12, 2005, p. 134  
Prikopa, January 12, 2005, p. 136 and following  
Prikopa, January 12, 2005, p. 144 and following  
Prikopa, January 12, 2005, p.180  
Prikopa, January 12, 2005, p.184  
Prikopa, January 12, 2005, p. 184  
Widdrington, November 30, 2004, p. 14  
Prikopa, January 12, 2005, pp. 188-192  
PW-43-1  
500-05-001686-946  
PAGE: 655  
“
1. A $ million investment is of substantial size relative to your portfolio and will  
be totally locked in – no provision for exit – money will be totally at risk of  
business – pay back only from long run earnings.  
2
–
. Business is doing very well but greatly sensitive to financial market conditions  
i.e. interest rates, exchange, etc., and particularly ability to continue to make  
strong spreads of 3% between loans placed and cost of borrowed money. Major  
risk is always spreads and quality of loans made, i.e. risk of loan loss.  
3
. What is the quality of present loan assets? How good are they – are there any  
shaky loans in portfolio?  
4
. Much of money invested in mortgages, etc., matures in 1990 and 1991 (close  
to 85%) – will company be able to redeploy these monies (about $1.1 billion)  
back into market with the same good 2% spreads?  
5
. How well do you know the management and how the company conducts its  
business – the material or Financial Statements don’t tell about that: -  
-
-
Where is most of money employed – America, I guess? –  
Where is most of borrowed money sourced from – From Europe  
maybe?  
-
What is the average quality of loans made – I assume they operate in  
the higher rate higher risk loan market – the 13% average rate earned  
and 3% spread suggests higher loan risk. –  
-
How does company deal with exchange factor in business? Is it hedged  
at a risk or used as a bet to take money on it? –  
-
-
-
-
-
-
What are company’s long run plans on leverage?  
Will it be maintained at present level? –  
How well does management and board work together –  
Is it a close knit group network?  
Is much of the business generated through this network? –  
What is the level of integrity brought to business deals?  
6
. Do you trust management and have total confidence that this group will run a  
successful business for years to come? At present cash return, you will need to  
count on at least 5 to 10 years of business success to get your money back.”  
[
3219] Monday morning, December 18, 1989, Prikopa and Taylor met early to discuss  
the possibility of Widdrington investing in three or four units of Castor.  
3
468  
comparing the financial implications  
[
3220] Prikopa prepared a handwritten analysis  
of investing in three or four units and concluded that, on a cash flow basis, it would be  
more advantageous to invest in three units only.  
[
3221] Later the same morning, another meeting was held at which Widdrington,  
3469  
Prikopa and Wood were present .They dealt with the outlining of Prikopa, comments  
3468  
PW-43-2  
500-05-001686-946  
PAGE: 656  
on the proposed investment, and on the financial information which had been remitted  
by Stolzenberg to Widdrington.  
3470  
[
3222] Right after this meeting, Widdrington consulted Taylor . Without audited  
financial statements, Taylor would never have recommended that Widdrington enter into  
the investment.3  
471  
[
3223] The following factors, some more important than others, participated in  
Widdrington’s assessing whether he should become a director and shareholder of  
Castor3  
472  
.
•
•
He had a good impression of Stolzenberg.  
He had information from the CIBC which indicated that Castor was a tightly and  
conservatively run company.  
•
•
Taylor had a positive impression of Stolzenberg and Castor.  
Sitting on the board of Trinity with Stolzenberg gave him a positive impression of  
Stolzenberg.  
•
•
His experience in making the deposit of $ 200,000 with Castor was very positive  
in that it showed that Castor handled it in a very professional manner.  
He had the audited financial statements which were accompanied by a clean  
auditors’ report and reflected a 10 year successful track record. He also had the  
unaudited financial statements of September 30, 1989, which he thought were  
reviewed by C&L, and looked very good.  
•
•
He had the valuation letter prepared by C&L.  
He discussed this investment with his advisors, Prikopa, Wood and Taylor, all  
knowledgeable individuals on whose advice he had relied for many years and  
who were all opining that the investment was worthwhile.  
3
473  
[
3224] Widdrington was essentially looking for a long-term investment opportunity,  
and his review of the valuation letter disclosed an increase in the fair market value of  
the shares, from less than $200, a few years earlier, to an estimated range of $525 to  
3469  
3470  
3471  
3472  
3473  
Prikopa January 12, 2005  
Prikopa, January 12, 2005  
Taylor, January 20, 2005  
Widdrington, November 30, 2004  
Widdrington, November 30, 2004  
500-05-001686-946  
PAGE: 657  
3
474  
Based on the experience of the past, there was lots of room for growth in the  
$550.  
3
475  
value of these common shares in the future, which precisely interested Widdrington.  
[
3225] Wood and Taylor took the position that it was a good opportunity for Widdrington  
to invest in Castor and to become a director of Castor. After having received such  
3
476  
supportive opinions, Widdrington decided to go ahead.  
[
3226] Widdrington invested in 10.75% convertible debentures, in 8% preferred shares  
and in common shares of Castor, in the form of four units of $282,600 each, for a total  
investment of $1,130,400, including his original investment of $200,000, plus the  
accumulated interest thereon.3  
477  
[
3227] Widdrington informed Prikopa of his intention to go ahead with a four unit  
investment. He instructed Prikopa to call Castor’s office and inform Castor of his  
intentions, which Prikopa did3  
478  
.
[
3228] On December 20, 1989, Prikopa received a copy of the shareholders’  
3479 3480  
that he remitted to Labatt’s Legal Department for review .  
agreement  
[
3229] On December 22, 1989, a fax was sent to Prikopa enclosing information he had  
3481  
.
requested on the mortgage portfolio  
[
3230] Widdrington’s instructions to transfer the money to Castor, and the actual money  
transfer to Castor, took place on December 28, 1989, after all requested information  
had been received3  
482  
.
[
3231] When Widdrington decided to invest in Castor, he was seeing his tenure as CEO  
of Labatt coming to an end and was looking for new challenges, as well as new sources  
3
483  
Widdrington  
of income. He was looking for a long-term investment opportunity.  
perceived that, as a director of Castor, he would progressively learn about Castor’s type  
of business, and as shareholder, there was a lot of room for growth in the value of his  
common shares in the future.3  
484  
3474  
3475  
3476  
3477  
3478  
3479  
3480  
3481  
3482  
3483  
3484  
Widdrington, November 29, 2004  
Widdrington, November 29, 2004  
Widdrington, November 30, 2004  
PW-11-1; PW-11-5; PW-11-6  
Prikopa, January 12, 2005  
PW-2382  
Prikopa, January 12, 2005  
PW-10-5  
PW-11-2; Widdrington, December 16, 2004  
Widdrington, November 30, 2004  
Widdrington, November 29, 2004  
500-05-001686-946  
PAGE: 658  
1
990-1991  
[
3232] In a memorandum to Widdrington dated May 20, 1990, following the release of  
the audited financial statements for the year ended on December 31, 1989, Prikopa  
3
485  
and highlighted the solid return on  
again concluded that Castor was doing well  
shareholders’ equity as well as the solid consistent growth in revenue and earnings of  
five years past.  
[
3233] Throughout 1991 up until Widdrington’s decision to subscribe for additional  
shares of Castor in October 1991, the interim financial statements disclosed that  
3
486  
Castor’s results were holding up in spite of the difficult business environment.  
[
3234] On September 3, 1991, Prikopa prepared a memorandum dealing with the six-  
3487  
:
month interim financial statement, in which he concluded  
«
Peter, Castor’s financial report for 6 months to June shows results are holding  
up fairly well at this year’s halfway mark, considering the difficult business  
environment.»  
[
3235] Legal for Life Opinions were included in the Directors’ Books received in  
connection with Castor’s Board meetings and Widdrington understood what such letters  
3
488  
3489  
meant.  
Two such Legal for Life Opinions were provided to Widdrington , based on  
the Legal for Life Certificates issued by C&L on February 16th, 1990 and February 15th,  
1
991 respectively.  
[
3236] Although Widdrington did not rely on the Legal for Life Opinions when making his  
initial investment, they were a factor considered by him and his investment advisor,  
3
490  
which contributed to his decision to maintain and increase his investment in  
Prikopa,  
991.  
1
T he 1991 investment  
[
3237] On October 25, 1991, Widdrington made a second equity investment in Castor,  
at which time he subscribed for one unit, composed of common shares, preferred  
3
491  
shares and a convertible debenture, for a total subscription price of $292,560.  
3
3
3
3
3
485  
486  
487  
488  
489  
PW-44-1  
PW-46; PW-47  
PW-46  
PW-12; PW-14, Widdrington, November 30, 2004; Widdrington, December 1, 2004  
PW-12, Tab 12, dated March 22, 1990 and PW-14, Tab 11, dated March 22, 1991  
Prikopa, January 12, 2005; Prikopa, January 13, 2005  
3
490  
491  
3
PW-19: "1991 Capital Subscription Form" dated October 25th, 1991 signed by Widdrington, with copy  
of a cheque dated October 25th, 1991 to Castor in the amount of $292,560.  
500-05-001686-946  
PAGE: 659  
[
3238] This second investment was preceded by a letter from Stolzenberg, dated  
3492  
The letter,  
September 25, 1991, requesting an increase of the capital base of Castor.  
accompanied by the interim financial statements as at June 30, 1991, outlined the  
circumstances that necessitated such call for capital, and referred to the banks’  
tightening of credit lines for real estate activities, and a desire on the part of Castor to  
show strength to the banks and outside investors. The letter was also accompanied by  
C&L’s valuation letter dated March 6, 1991, establishing a current fair market value of  
$
580 per common share. The C&L valuation letter specifically states: «Based on this  
valuation, the proposed subscription price for common shares is $580.00.»  
[
3239] Widdrington believed that the strategy put forward by Stolzenberg of raising new  
capital, seemed to make sense, and was consistent with what Castor had done in the  
past to raise equity.3  
493  
3
494  
[
3240] When he received the letter , Widdrington gave it to Prikopa who prepared a  
memorandum, wherein he concluded that this was a good investment for  
3
495  
In accordance with Prikopa’s advice, Widdrington decided to wait until  
Widdrington.  
he had attended the Castor Board meeting on October 24, 1991, and until he had had  
the opportunity to discuss this matter with Stolzenberg and other members of the Board,  
before making his decision.3  
496  
[
3241] C&L’s valuation letter dated October 22, 19913497 which Widdrington received at  
the Board meeting of October 24, 1991, and which indicated the fair market value of  
Castor’s common shares as at September 30, 1991, was the critical factor which  
3
498  
impelled him to make his second equity investment.  
[
3242] Widdrington believed that the other shareholders and directors of Castor were  
going to participate in that capital subscription. He acknowledged that, as compared to  
the valuation letter dated March 6, 1991, the fair market value ascribed by C&L to the  
common shares of Castor, had decreased slightly, as a reflection of the more difficult  
3
499  
However, the book value of these shares had substantially  
business conditions.  
increased since the March 6, 1991 valuation letter, and C&L’s letter of October 22, 1991  
stated that because of the slowdown in the real estate market in North America,  
3
492  
493  
PW-17  
3
Widdrington, December 2, 2004; For the reference to the company raising more capital in the past  
see also PW-16-3 Tab 6; PW-51, p. 4  
PW-17  
3494  
3495  
3496  
3497  
3498  
3499  
PW-47; Widdrington, December 1, 2004  
Widdrington, December 1, 2004  
PW-18, Tab 6  
Widdrington, December 2, 2004  
Widdrington, December 2, 2004  
500-05-001686-946  
PAGE: 660  
3
500  
an assertion that made a  
additional opportunities would be available to Castor,  
3
501  
strong impression on Widdrington.  
[3243] Widdrington’s decision to buy an additional unit in October 1991 was taken in a  
context where the overall impression about Castor’s performance was very positive.  
The value of the units for this new capital call was listed at $292,560 per unit, as  
compared with the price of $282,600 per unit which he had paid for his first equity  
investment approximately a year earlier. For him, this confirmed that the value of the  
units had gone up approximately $10,000 in that period of time, and this in turn reflected  
the increase in the value of the shares that had been determined by the several  
3
502  
valuation letters issued by C&L over that same period.  
[
3244] Audited financial statements and valuation letters were similarly key to  
3503  
Widdrington’s decision to make his second equity investment in October 1991.  
3504  
[
3245] Prikopa supported Widdrington’s decision to proceed with said investment,  
something he would not have done if the valuation letter or the financial statements had  
raised any concern.  
[
3246] Prikopa testified that the size of Widdrington’s investment in Castor, in the  
3505  
context of what he wanted to achieve with his portfolio, was within prudent limits.  
Board of directors  
[
3247] When he was first approached by Stolzenberg to become a director of Castor,  
during their December 13, 1989 meeting, Widdrington told Stolzenberg that he did not  
3
506  
have experience or broad in-depth knowledge of mortgages and real estate market.  
[
3248] Castor’s Board included international and experienced directors with diverse  
3507  
Widdrington regarded this as an opportunity for him to make a positive  
talents.  
3
508  
contribution in the future.  
A director acquires his knowledge as a learning  
It is a common situation that the directors who compose the board of any  
given company have different and complementary strengths, and it is normal for  
3
509  
process.  
directors to lean on each other and rely on each other’s respective specialty.  
3
510  
3500  
3501  
3502  
3503  
3504  
3505  
3506  
3507  
3508  
3509  
3510  
PW-18, Tab 6, p. 4  
Widdrington, December 2, 2004  
Widdrington, December 1, 2004  
Prikopa, January 17, 2005  
Prikopa, January 13, 2005  
Prikopa, January 17, 2005  
Widdrington, November 29, 2004  
PW-43-1  
Widdrington, November 30, 2004  
Prikopa, January 17, 2005  
Jarislowsky, April 5, 2005  
500-05-001686-946  
PAGE: 661  
[
3249] For Widdrington, the role of a director in general, and his role as director of  
Castor in particular, consisted in ensuring that the company had direction, a game plan,  
and the right people in place to carry it forward; such a role did not require directors to  
3
511  
Widdrington did not view his  
know a great deal about the specifics of the business.  
role as director as requiring him to examine the nuts and bolts of the business. It was  
up to the auditors to examine the financial details, and the auditors would bring any  
3
512  
areas of concern to the attention of the directors.  
[
3250] Widdrington was an “outside director” at Castor and Prikopa did not expect him  
to have the kind of knowledge of the company that an inside director would have. As an  
“
outside” director, Widdrington had to rely on representations of management and  
3513  
disclosure of auditors for verification of management’s representations.  
[
3251] Castor’s board did not discuss individual loans or individual loan decisions:  
Stolzenberg had full authority and the full confidence of Castor’s directors and he  
basically made the final decisions on those matters.3514  
.
Widdrington,Trinity, Stolzenberg and Castor  
[3252] From late 1987 until early 1992, Widdrington was a director of Trinity Capital.  
[
3253] He was asked by Binch to become a director of Trinity to advise on the  
opportunity of different investment ventures for the company. Widdrington did not invest  
in Trinity, either as a shareholder, or otherwise, and he received a remuneration of  
3515  
5,000 per year, for attending two or three directors’ meetings.  
$
[
3254] Widdrington was not involved in, or inquired about the day-to-day operations or  
the financial matters of Trinity; he was not on the company’s payroll and he had no  
management responsibilities.3  
516  
[
3255] While still a director of Trinity, Widdrington progressively distanced himself from  
the company when Trinity started to become involved in the landfill business because,  
as a director and eventually chairman of Laidlaw which was involved in that business,  
Widdrington did not want to be in a conflict of interest. From the very beginning, he  
voiced his disapproval of Trinity getting involved in the landfill business which he  
3
517  
considered to be completely out of Trinity’s league.  
3511  
3512  
3513  
3514  
3515  
3516  
3517  
Widdrington, November 30, 2004  
Widdrington, December 1, 2004  
Prikopa, January 13, 2005; Prikopa, January 17, 2005, pp. 112-114  
Dennis, September 8, 1995, pp. 38-39  
Widdrington, November 29, 2004  
Widdrington, November 29, 2004  
Widdrington, November 29, 2004; Widdrington, November 8, 1995  
500-05-001686-946  
PAGE: 662  
[
3256] Widdrington always considered Castor and Trinity as completely separate  
3518  
and it never occurred to him that they could constitute related parties in  
companies  
accounting terms3  
519  
.
[
3257] While Widdrington acknowledged that by the Board meeting of June 26, 1990 he  
3520  
he never considered  
was aware that Trinity was not doing very well financially,  
Trinity’s loans to be bad loans. From the beginning of his involvement in Trinity, he  
consistently voiced his concern that the company was getting involved into too many  
businesses and in businesses that it should not have been in. However, Widdrington  
believed Trinity could be righted reasonably quickly if the company just stuck to the  
elements of the business and stopped running around trying to be everything to  
everyone.3  
521  
[
3258] Widdrington was not so much concerned with the financial aspects of Trinity as  
3522  
with the operational aspects of the company.  
[
3259] Had there been any concerns about the quality of Castor’s loans to Trinity, if this  
had ever been an issue, Widdrington thought it would have been discussed with the  
auditors of Castor and, in case of a “bad loan”, that there would have been a loan loss  
provision. To put things in perspective, Widdrington noted that, as of May 1990, Castor  
had assets of approximately $1.6 billion compare to Trinity’s loans totalling  
approximately 14 million3  
523  
.
[
3260] Prior to 1992, Widdrington was not aware of the specific details of Trinity’s  
3524  
financing . While Trinity’s board was a very active Board, Binch confirmed that on the  
financing side of the proposed transactions “the dialogue in the Board meetings was, in  
the main, not that expository, except if there was something substantive or  
significant”3  
525  
.
[
3261] No officer of Trinity could borrow or lend money for the account of the  
3526  
Loans extended  
corporation without the specific approval of the board of directors.  
by CHIO or CH Ireland to Trinity were sometimes approved through written resolutions,  
some of which were signed by Widdrington.  
3518  
3519  
3520  
3521  
3522  
3523  
3524  
3525  
3526  
Widdrington, December 15, 2004  
Widdrington, December 13, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 14, 2004  
Binch, October 30, 2001, pp.209-212  
D-594 Article 7  
500-05-001686-946  
PAGE: 663  
3
527  
and the briefing  
[
3262] The minutes of Trinity’s board meeting of October 5, 1988  
3
528  
book for said meeting , which Widdrington reviewed as a director, had sections  
relating to the Stanwix transaction and information relating to CHIO financing.  
3
529  
[
3263] The minutes of Trinity’s board meeting of June 29, 1989  
at the offices of  
Labatt in Toronto had a section on the Cadiz landfill transaction also funded by CHIO.  
[
3264] By the time Widdrington made his equity investment in Castor in December  
1
989, he had been a director of Trinity for slightly over a year-and-a-half and, as such,  
3530  
.
had heard names such as CHIO being mentioned at Trinity board meetings  
[
3265] The material relating to Trinity’s Board meeting of June 26, 1990, received and  
reviewed by Widdrington, included information relating to Trinity’s financing through  
Castor’s subsidiaries3 . Then, Widdrington had been appointed to Castor’s Board.  
531  
[
3266] As at June 1990, Widdrington did recall a discussion concerning Trinity’s  
financial status, but not the specifics of such discussion, and was aware of CHIO and  
CHI’s relation to Castor3  
532  
.
[
3267] In fact, funding of Trinity was provided mainly by Castor’s subsidiaries.3533  
Taylor – Fitzsimmons  
[
3268] Taylor recalled meeting with an investigator for C&L by the name of Fred  
3534  
.
Fitzsimmons but not the specific topics they would have discussed  
[
3269] Fitzsimmons testified that in 1998 he met with Taylor and prepared a written  
3535  
. In cross-examination, Fitzsimmons acknowledged that:  
report subsequently  
•
•
He interviewed many people.3536  
He did not recall the length of his meeting with Taylor.3537  
3527  
3528  
3529  
3530  
3531  
3532  
3533  
3534  
3535  
3536  
3537  
D-602  
D-603  
D-605  
Widdrington, December 17, 2004  
D-610, D-611 and D-612  
Widdrington, December 15, 2004  
Binch, October 30, 2001, pp. 201-202  
Taylor, January 20, 2005  
D-671  
Fitzsimmons, January 23, 2006, p. 23  
Fitzsimmons, January 23, 2006, p. 37  
500-05-001686-946  
PAGE: 664  
•
In other occasions he had asked the person he had interviewed to review his  
“
résumé” and correct anything that would not be accurate, but that he did not do  
3538  
it with Taylor.  
•
In various occasions, when he had asked the person to review a “résumé” he  
had written, the person had edited such “résumé” (actually added statements or  
3
539  
deleted statements that appeared in it).  
•
•
•
In various occasions, he recorded his interviews but he had not recorded the  
interview with Taylor.3  
540  
He could have made mistakes while recording what he thought Taylor was telling  
him.3  
541  
3
542  
but rather  
The words included in his report were not the exact words of Taylor  
3
543  
Fitzsimmon’s impressions and understandings.  
Experts’ evidence  
P laintiff’s experts  
Lowenstein  
[
3270] In 1998, when Lowenstein authored his report, he had been the «chairman and  
3544  
owner of a financial service and merchant banking firm for twenty years».  
[
3271] Lowenstein concluded that: «I am of the opinion that Mr. Widdrington conducted  
sufficient due diligence by relying on the Audited Consolidated Financial Statements,  
unaudited interim financial statements of Castor as well as the valuation letters,  
discussions with his advisors and obtaining other relevant information. It was  
reasonable for Mr. Widdrington to have relied primarily upon Castor's Audited  
Consolidated Financial Statements and the share valuation letter dated October 17,  
3
545  
1
989; March 6, 1991 and October 22, 1991.»  
3
3
3
3
3
3
3
3
538  
Fitzsimmons, January 23, 2006, pp. 28, 33, 44-45  
539  
Fitzsimmons, January 23, 2006, p. 33  
Fitzsimmons, January 23, 2006, p. 33  
Fitzsimmons, January 23, 2006, pp. 40-41  
Fitzsimmons, January 23, 2006, p. 41  
Fitzsimmons, January 23, 2006, pp. 42-50  
PW-2404, p. 1.  
540  
541  
542  
543  
544  
545  
PW-2404, p. 5.  
500-05-001686-946  
PAGE: 665  
[
3272] Lowenstein characterized Widdrington as a “sophisticated high net worth private  
investor” because of Widdrington’s business and investment expertise and because of  
Widdrington’s net worth3  
546  
.
[
3273] Lowenstein opined that a reasonable private investor at the time of Widdrington's  
initial investment would have assumed that C&L was in a position to have detailed  
knowledge of Castor's operations, financial position, and method of conducting  
3
547  
: C&L could not have issued unqualified auditors' reports, nor could they  
business  
have produced a valuation letter, such as the one they did produce, without being in that  
position. Accounting firms of C&L’s reputation did not issue valuation letters without  
understanding in depth the nature of the company they were valuing.  
[
3274] Lowenstein opined that a reasonable sophisticated high net worth private  
investor, when provided with the unqualified audited financial statements and the  
valuation letter by C&L, would have invested in 1989, as Widdrington did, and would  
have supported the company and increased his investment in 1991, as Widdrington  
also did.3  
548  
[
3275] Lowenstein acknowledged that the concerns and risks outlined in Prikopa’s  
memo were valid and he explained that it was Prikopa’s role to bring them all to  
Widdrington’s attention3  
549  
.
[
3276] Lowenstein confirmed the shareholders’ agreement was an important document  
to consider prior to making an investment in Castor since Castor was a private company  
and since the agreement would set forth the terms and conditions enabling an investor  
to sell his shares. He would have recommended reading the agreement and getting  
legal advice3  
550  
.
[
3277] Lowenstein confirmed that he had experience as a director of industrial, financial  
services, and venture capital companies. He was also a director of two publicly traded  
companies. He further stated having experience in corporate governance and added  
3
551  
.
that he was a “student” of this and updated himself on this issue  
[
3278] Lowenstein testified that it was important for Widdrington to know more about  
Castor as a director than as a shareholder.  
3546  
3547  
3548  
3549  
3550  
3551  
Lowenstein, March 23, 2005; PW-2404  
Lowenstein, March 21, 2005; PW-2404  
Lowenstein, March 21, 2005; PW-2404  
Lowenstein, March 24, 2005; PW-2404  
Lowenstein, March 24, 2005  
Lowenstein, March 24, 2005  
500-05-001686-946  
PAGE: 666  
[
3279] As a director, Lowenstein would have obtained as much information as he could  
over time; he would have carefully read the board materials provided prior to meetings;  
he would have done as he testified: “listen attentively, you don't ask a lot of questions,  
3
552  
you don't come in like a bull in a china shop” ; he would have expected any  
significant issue or major change to be brought forward by management to the  
3
553  
.
board  
Jarislowsky  
[
3280] Jarislowsky confirmed the shareholders’ agreement was an important document  
to consider prior to making an investment in Castor since Castor was a private company  
and since the agreement would set forth the terms and conditions enabling an investor  
3
554  
to sell his shares . As Lowenstein, he would have recommended reading the  
3
555  
.
agreement and getting legal advice  
[
3281] Jarislowsky confirmed that, at the time, Stolzenberg was known as a highly  
respected financier and entrepreneur and that he apparently had the confidence of  
many international and Canadian banks and financial institutions, given the bank loans  
and facilities Castor got3  
556  
.
[
3282] Several times, Jarislowsky said Prikopa’s memo was a very good analysis of the  
major risks in this kind of investment, adding that he did not think he would have done it  
much better himself3  
557  
.
[
3283] Jarislowsky opined that Widdrington was primarily misled as a result of his faith  
in the accuracy of the audited financial statements of Castor, and as a result of the  
share valuation letter, all of which disclosed a healthy and fast growing company with an  
uninterrupted string of success. He mentioned reliance in Stolzenberg as a secondary  
3
558  
cause, but disagreed with Defendants as to its relative significance.  
[
3284] Answering a question put to him in cross-examination by C&L’s counsel relating  
to reliance, Jarislowsky said:  
My feelings is that both Stolzenberg, My Lord, and the auditors knew what the  
real situation was, that's my basic feeling. But they did not divulge it to other  
people and they consistently raised new money in order to make sure that they  
weren't going over the cliff, and they raised money from the same people to  
3552  
3553  
3554  
3555  
3556  
3557  
3558  
Lowenstein, March 24, 2005  
Lowenstein, March 24, 2005  
Jarislowsky, April 4, 2005  
Jarislowski, April 4, 2005  
Jarislowsky, April 4, 2005  
Jarislowsky, April 4, 2005  
Jarislowsky, April 4, 2005  
500-05-001686-946  
PAGE: 667  
whom they gave incomplete and unreliable information. I would even go further  
…)I believe that both parties (Castor and C&L) knew what they were doing (…)  
(
I'm not sure whether everybody at Coopers & Lybrand knew what was being  
done but I'm sure that the main partners and the support staff knew because the  
most important item of any corporation of this type is the solvency of its loan  
portfolio and the cash revenue and the maturities on a cash basis should have  
given the picture to both Stolzenberg and the auditors. That's my view.3  
559  
[
3285] Jarislowsky did not believe that a typical individual high net worth investor would  
have done any more due diligence than Widdrington.  
[
3286] Jarislowsky concluded that, based on the work of C&L, it would have appeared  
that Stolzenberg «had led Castor to spectacular results» and that «any individual  
investor, basing himself on the audited results and on the share valuation letter, would  
have concluded that this was a sound operation. The company had come through good  
and less good years with flying colours. The auditor’s report was clear and  
3
560  
unqualified».  
trust the audited financial statements of such a prominent international firm as Coopers  
Lybrand? I myself would have also accepted it at face value. I know of no  
shareholders who disregard an audited statement of a major accounting firm in favour of  
In Jarislowsky’s words: «Why would one expect Widdrington to not  
&
3
561  
their own private investigations».  
[
3287] Both Lowenstein and Jarislowsky considered that Defendants’ experts imposed a  
burden of due diligence on Widdrington that far exceeded what could be expected of an  
individual investor, albeit one who became a director, and in fact would obviate the need  
for the auditors.  
[
3288] Jarislowsky described the Lajoie report as «an outline of how a trained analyst  
would proceed to a full “due diligence” for a major merger or an acquisition when having  
full access to the “war room” of a corporation» and also noted that the nature of the due  
diligence advocated by Mr. Lajoie, «essentially requires expertise in several  
professional disciplines».3  
562  
[
3289] Jarislowsky would expect a prudent director to know about the company’s key  
3563  
.
officers and employees  
3559  
3560  
3561  
3562  
3563  
Jarislowsky, April 4, 2005  
PW-2405, p. 7  
PW-2405, p. 11  
PW-2405, p. 10  
Jarislowsky, April 5, 2005  
500-05-001686-946  
PAGE: 668  
[
3290] Jarislowsky would expect a new director (as Widdrington was) to know about the  
company’s major transactions, although not immediately: “When you just come on a  
Board you are not going to upset the apple cart, you're not going to make waves, you're  
going to sit there, you're going to observe the other directors, you expect the other  
3
564  
.
directors to carry the ball till you are on stream and up to speed”  
[
3291] Jarislowsky would expect that a director of a company such as Castor would  
3565  
.
know the company’s main borrowers and projects for which loans were extended  
[
3292] With respect to the Morrison’s report, Jarislowsky disagrees that the audited  
financial statements of Castor disclosed that Castor was a «lender of last resort» or that  
3
566  
In fact, they disclose the exact opposite.  
its activities were «fundamentally high risk».  
Rosen  
[
3293] Rosen expressed the opinion that audited financial statements did not provide  
assurance to investors.  
(
…) there is a limited scope to attest audits and, on that particular basis, you then  
have to interpret the figures in light of the fact that they're primarily  
management's assertions, sometimes well audited, sometimes not.3  
567  
[
3294] Rosen confirmed that end users of financial statements should not solely rely on  
figures of said financial statements:  
Q. (…) is that end users got to go beyond what they see in the financial  
statements, correct, they have to ask questions, they have to get further  
information, they have to know the basis upon which the numbers are selected,  
is that correct?  
A- And that...  
Q- Is that correct?  
A- Correct, and that, what I have to correct about your comment is that the  
financial statements have notes and, in those notes, you were supposed to show  
what the accounting policies are and if one does a good job of reading the notes  
to try to pick up what the accounting policies are, that would go a long way before  
one man goes into the Internet and other sources.3  
568  
3564  
3565  
3566  
3567  
3568  
Jarislowsky, April 5, 2005  
Jarislowsky, April 5, 2005  
PW-2405, p. 13  
Rosen, February 26, 2009, p.106  
Rosen, February 26, 2009, pp. 110-111  
500-05-001686-946  
PAGE: 669  
D efendants’ experts  
[
3295] All the experts who were called by Defendants to testify at trial on the issue of  
reliance stated that making a sound business decision to invest in a company requires a  
substantial amount of information above and beyond what may be contained in the  
3
569  
.
financial statements, especially if they are dated as in this case  
Morrison  
[
3296] Morrison did not hesitate to characterize Widdrington as a sophisticated  
3570  
: while Widdrington was not a financial executive, he obviously had a strong  
investor  
3
571  
.
command of financial statements, business valuations and due diligence  
[3297] Morrison described Widdrington and his team of advisors as follows:  
unusually strong situation that Mr. Widdrington not only had his personal ability  
demonstrated track record, but in addition to that he had resources which were  
available to him and which clearly he used and relied on and in total made it an  
extremely strong situation3  
572  
You would rarely get the combination of greater advice or rapport, if I can use  
that word, amongst the team that would provide better input than Mr. Widdrington  
was quite fortunate enough to have.3  
573  
Well, the totality was extremely high. And this was, you know, certainly much  
higher than normal, even for a sophisticated investor it would be, you know,  
3574  
frankly hard to exceed the quality of investment advice that was available here  
3569  
3570  
3571  
3572  
3573  
3574  
Lajoie, October 17, 2006; Morrison, October 4, 2006  
Morrison, October 3, 2006, pp.156-164  
Morrison, October 3, 2006, p. 158  
Morrison, October 3, 2006, pp.163-164  
Morrison, October 3, 2006, p.164  
Morrison, October 3, 2006, p. 164  
500-05-001686-946  
PAGE: 670  
[
3298] Morrison opined that :  
•
Widdrington, unfortunately, got inaccurate and out-of-date information from  
CIBC- the Royal Bank in fact had not been a significant or important lender to  
Castor for quite a few years in 1987 and, in fact, never really became a major  
lender to Castor.3  
575  
•
•
Widdrington regarded Stolzenberg vey highly, took many steps to introduce him  
3
576  
.
to business relations and was eager to join him on Castor’s board of directors  
3
577  
Widdrington had “almost blind faith in Stolzenberg”.  
Widdrington's decision to invest in Castor was very important to him since the  
$
1.1 million investment, required to become a Director in October 1989,  
3578  
and that, therefore, the situation  
represented about 20% of his total portfolio  
should have required a very thorough and careful evaluation before any  
3
579  
.
investment commitment was made  
•
the information available to Widdrington was highly inadequate to make a sound  
decision on whether to invest in the package of debentures, preferred shares and  
3
580  
- before he gave the go ahead,  
common stock which he was offered  
Widdrington did not have the shareholders’ agreement and the mortgage  
3
581  
portfolio analysis on hand.  
[
3299] Morrison recognized that the audited financial statements did, in fact, provide a  
degree of comfort as to the future. He acknowledged that Castor’s extraordinary trend  
on retained earnings, as reflected in such statements for the period extending from  
1
978 to 1990, not only revealed a history of net profits accumulated, but indicated that  
the company would normally dispose of a buffer to weather more difficult times in the  
3
582  
future.  
[
3300] Morrison acknowledged that there was a difference between the due diligence  
exercise required from someone buying a whole company and the due diligence  
required from someone making an investment as one of numerous shareholders in a  
company3  
583  
.
[
3301] Morrison was forced to recognize that it would make no sense for the Court to  
impose different standards of due diligence if the Court was to form an opinion on two  
3575  
3576  
3577  
3578  
3579  
3580  
3581  
3582  
3583  
Morison, October 3, 2006, p. 204; Morrison, October 4, 2006, pp. 8 and following  
Morrison, October 3, 2006, p. 205 and following ; Morrison, October 4, 2006, pp.13-15  
Morrison, October 3, 2006, p. 210, 217, 243  
Morrison, October 3, 2006, p. 220  
Morrison, October 3, 2006, p. 222  
Morrison, October 3, 2006, p. 222 and following  
Morrison, October 3, 2006, p. 231 and 238  
Morrison, October 11, 2006, pp. 7-9 and 12  
Morrison, October 3, 2006, p.73  
500-05-001686-946  
PAGE: 671  
plaintiffs who invested in Castor, one who made a $1.1 million investment that  
represented 1% of his net investment portfolio and one who made a $1.1 million  
3
584  
investment that represented 20% of his net investment portfolio.  
[
3302] According to Morrison, if market conditions deteriorated, if Castor’s growth  
slowed down, or if it developed financial problems, it might become difficult, if not  
3
585  
.
impossible, for a shareholder to sell his shares  
Lajoie  
[
3303] Lajoie was asked to answer the two following questions3586  
:
•
What critical and essential information should a prudent investor and his  
professional advisor examine before making an investment decision?  
•
For each investment he made in Castor, was the information used by  
Widdrington sufficient to make a sound decision?  
[
3304] Lajoie opined that taking a sound business decision to invest in a corporation  
requires a substantial amount of information and a careful assessment thereof, and that  
the information required goes way beyond the simple financial information.  
[
3305] Lajoie pointed out that financial statements do not reveal some of the most  
3587  
critical factors that impact businesses , such as management competence and  
continuity market trends. He mentioned that since these non-financial factors, determine  
the future structure and viability of a company more often than not, potential investors  
must carefully study them during their due diligence exercise.  
[
3306] Lajoie said that the burden of getting the required information to make a sound  
decision rests on the investor when he contemplates investing in a private corporation.  
Should he have difficulty in obtaining such information, or should he only get partial  
answers to his questions, the investor should wonder about the seriousness of the  
company and question his decision to invest in it.  
[
3307] Lajoie opined that the best document concerning information on a business was  
3588  
the Business Plan , a document prepared by management periodically addressing  
the objectives of the corporation on a medium and a long-term basis together with the  
means taken and to be taken to achieve these objectives, and which is generally  
approved by the Board of directors.  
3584  
3585  
3586  
3587  
3588  
Morrison, October 11, 2006, pp.148-150  
Morrison, October 4, 2006, pp.65-79  
D-867-1, p. 1  
Lajoie, October 16, 2006, p.179  
Lajoie, October 16, 2006, pp. 233 and following  
500-05-001686-946  
PAGE: 672  
[
3308] Lajoie admitted that it could be comforting to know that the corporation had a  
solid background. He added that a prudent investor should nevertheless keep in mind  
that what he was buying was the future potential income or growth the investment had  
to offer. Therefore, the information to be obtained must also include information on the  
future financial health of the corporation.  
[
3309] Lajoie noted that Castor’s growth was “remarquable, according to its audited  
3589  
.
consolidated financial statements”  
[
3310] Lajoie listed different types of information an investor should get and analyze  
before making his final decision, including past financial information, projected  
information and legal and corporate information.  
3
590  
[
3311] Lajoie opined that, in 1989, Prikopa made a very good analysis  
and that he  
had correctly pointed out the level of risk of the business in which Castor was involved,  
i.e. the risky loan market. Prikopa had raised important issues such as:  
•
•
Sensitivity to financial market conditions.  
Quality of the loans portfolio taking into account the nature of the business of  
Castor.  
•
•
•
Trust in management.  
Lack of marketability of the Castor shares.  
Potential mismatch of the loan maturities and the debt maturities and potential  
difficulty to re-invest the money at profitable rates.  
[
3312] Lajoie shared Prikopa’s comment “How well you know the management and how  
the company conducts its business – the material or financial statements don’t tell about  
that”  
[
3313] Reviewing the information obtained and looked at by Widdrington and his  
advisors for the 1989 investment, Lajoie concluded that it was too basic and incomplete  
3
591  
mainly because, in his opinion, none of the  
to arrive at a reasonable decision  
questions asked and answered, and none of the documents received and reviewed  
3
592  
.
dealt with the future of the business  
3589  
3590  
3591  
3592  
Lajoie, October 18, 2006, p.13  
Lajoie, October 17, 2006, pp.39 and following  
Lajoie, October 17, 2006, pp.81 and following  
Lajoie, October 17, 2006, pp.120 and following  
500-05-001686-946  
PAGE: 673  
[
3314] Lajoie opined that Widdrington did not take sufficiently into account various red  
3593  
which should have prompted his decision  
flags that preceded his 1991 investment,  
not to invest.  
[
3315] Lajoie acknowledged that Lowenstein and Jarislowsky were two experienced  
3594  
investors.  
[
3316] Lajoie said he shared the following comment made by Higgins, a C&L partner:  
“
an audit is essentially a search by the accountant for supporting documentation to  
3595  
confirm or corroborate the representations of the client”  
.
[
3317] Lajoie admitted that audited financial statements were an important investment  
3596  
and that the identity and reputation of the auditor, which he compared to a trade  
tool,  
3
597  
mark, were relevant factors.  
[
3318] Lajoie said anyone had to take for granted that the consolidated audited financial  
statements of Castor reflected the actual financial situation of Castor, as of their  
3
598  
respective date, since it could not be otherwise.  
[
[
3319] Lajoie agreed that independence of the auditor was essential. 3599  
3320] Lajoie acknowledged that when an investor had an unqualified audit opinion of a  
lender on hand, the investor could take for granted that, as of the date of said audited  
consolidated financial statements, the auditor had looked at the existence of the loans  
and at the borrowers’ capacity to reimburse them. Lajoie acknowledged also that the  
auditor had to use the lowest of cost or net realizable value to assess the loans’ worth,  
as assets3  
600  
.
[
3321] Lajoie recognized that the charts prepared from information appearing in the  
3601  
were showing very good, very  
consolidated audited financial statements of Castor  
3
602  
.
interesting, highly impressive results  
[
3322] Obviously, had Lajoie been the investor, the fact that Castor was a private  
3603  
.
company, and the issue of exit ability, would have been deterrent  
3593  
3594  
3595  
3596  
3597  
3598  
3599  
3600  
3601  
3602  
3603  
Lajoie, October 17, 2006, pp. 136 and following and pp. 250 and following  
Lajoie, November 19, 2009, p. 32; Lajoie, November 20, 2009, p.37  
Lajoie, November 19, 2009, pp. 36-43  
Lajoie, November 19, 2009, p. 48  
Lajoie, November 19, 2009, pp. 45-47  
Lajoie, November 19, 2009, pp. 53 and following, p.64  
Lajoie, November 19, 2009, pp. 63-64  
Lajoie, November 19, 2009, p. 82  
PW-2888 to PW-2892  
Lajoie, November 19, 2009, pp. 128-132  
Lajoie, November 19, 2009, pp.152 and 201 and following  
500-05-001686-946  
PAGE: 674  
Conclusions  
[
3323] When a witness is able to assist the Court in understanding the facts to which he  
is testifying, is consistent in his answers and does not contradict himself on significant  
issues or significant aspects of the litigation, and when the evidence as a whole  
corroborates his version of the facts, chances are the Court will attach credibility and  
reliability to his or her sayings. This neither means that a testimony will be discarded if  
the Court finds contradictions, nor that credibility and reliability will be granted in the  
absence of same.  
[
3324] Insofar as the circumstances of Plaintiff’s decision to invest in Castor are  
concerned, Widdrington’s testimony coupled with the testimony of Prikopa and Taylor is  
consistent with, and corroborated by, other evidence in the record. Notwithstanding  
some internal contradictions within Widdrington’s testimony at discovery and trial, which  
are relatively minor, the Court finds the testimonies of Widdrington, Prikopa and Taylor  
credible and reliable.  
3604  
[
3325] As Lowenstein and Morrison said , a high standard of prudence and care  
should be imposed upon a well-educated individual with a great deal of prior investment  
and business experience.  
[
3326] Defendants point to Widdrington’s position as a director of Trinity, and suggest  
that, in that capacity, he should have been put on notice of Castor’s undisclosed  
transactions with related parties and Castor’s non-performing loan portfolio. In the  
circumstances established in evidence, using the standards of corporate governance  
that were generally followed in the 80s and without relying on hindsight, the Court does  
not share Defendants point of view.  
[
3327] Widdrington’s role in Trinity was very limited. As an outside director, he was not  
involved in, or questioned on, the funding of Trinity’s investment activities or any of its  
financial matters. Moreover, Widdrington testified that he was not aware of any affiliation  
or other form of relationship between Trinity’s majority shareholder, namely First  
Holdings Cyprus Ltd., and the Castor group of companies. In fact, all that Widdrington  
knew was that Stolzenberg had injected 90% of the money in Trinity through one of his  
3
605  
Widdrington also testified he didn’t  
companies, but he did not recall First Holdings.  
have any specific knowledge of loans extended by Castor or its subsidiaries to Trinity  
3
606  
for most of his tenure as a director of Trinity.  
[
3328] Prior to making his decision to invest in 1989, Widdrington was advised by three  
knowledgeable people and sophisticated readers of financial information (Prikopa,  
Taylor and Wood) who all considered the results to be excellent and enviable.  
3604  
3605  
3606  
Lowenstein, March 23, 2005; Morrison, October 3, 2006  
Widdrington, December 14, 2004  
Widdrington, December 14, 2004  
500-05-001686-946  
PAGE: 675  
[
3329] Prikopa and Taylor’s testimony are clear, fully supported by the  
contemporaneous documents prepared at the time of the subject investments.  
Widdrington’s testimony is coherent, corroborated by the testimony of Prikopa and  
Taylor, as well as by the documentation filed in the record.  
[
3330] Widdrington was fundamentally misled by the opinions contained in the  
consolidated audited financial statements, the valuation letters, and induced to make  
investments that he clearly would not have made without such statements or had he  
known the real gist of Castor.  
[
3331] Widdrington made equity and debt investments based on valuation letters that  
were provided to him prior to his investment in December 1989 and in October 1991.  
Each investment included units composed of common shares, preferred shares and  
debentures of Castor. The valuation letters specifically referenced these components of  
the fund raising activities of Castor.  
[
3332] Widdrington was entitled to accept and rely on such opinions for the purposes of  
his investments in 1989 and 1991 and the determination of the price that he was  
prepared to pay in connection therewith.  
[
3333] Widdrington would simply not have made investments in Castor absent the  
unqualified opinions by one of the world’s largest and most prestigious accounting firms.  
If Castor’s true financial position had been disclosed in the audited financial statements  
for the years ended 1988, 1989 and 1990, as well as in the share valuation letters,  
Widdrington would never have made any of his investments.  
[
3334] Plaintiff’s experts on reliance, Lowenstein and Jarislowsky, were exceptionally  
qualified to opine on Widdrington’s investments in the equity of Castor.  
[
3335] Had C&L done what they had to do, Castor would not have been able to present  
audited financial statements showing results even close to those appearing in C&L’s  
audited reports and financial statements. Had C&L qualified its audit opinions and  
disclosed the extent of capitalization of interest Castor recognised as earnings,  
Widdrington would not have invested.  
[
3336] Widdrington relied on the knowledge and advice of those who had more  
experience than he had; i.e., Wood, Taylor and Prikopa. He was an experienced  
businessman based on his functions at Labatt and other companies, but certainly not a  
sophisticated investor in a company such as Castor. He was entitled to rely on the  
presumed knowledge, expertise and professionalism of C&L, who had acted as Castor’s  
auditors since inception, and who had been valuing Castor’s shares since 1980.  
[
3337] Prior to making his investments in Castor, Widdrington sought and obtained  
advice from three individuals with considerable experience in financial matters, thus  
acting prudently and reasonably, and exercising a proper measure of due diligence.  
500-05-001686-946  
PAGE: 676  
[3338] The various points underlined by Wood, Prikopa and Taylor, demonstrate that  
relevant matters were duly considered, prior to Widdrington making his investments. All  
of this in no way detracts from the proof that the two most important factors considered  
by Widdrington and his advisors were the following: the financial position of Castor, as  
reflected in the audited financial statements over a period of several years, and the fair  
market value of Castor’s shares, as determined and opined upon by C&L. These factors  
easily outweigh any of the issues raised by his advisors.  
[
3339] Morrison acknowledged the very substantial and high-quality advice which  
3607  
Lowenstein testified that, as compared to the  
Widdrington sought and obtained.  
average typical high net worth investor, Widdrington’s access to such expertise was  
both fortunate and unusual.3 This opinion was echoed by Jarislowsky.  
3609  
608  
[
3340] Given the information that was provided year after year in the audited  
consolidated financial statements, it was reasonable for Widdrington to rely on same for  
his investments in Castor.  
[
3341] Experts for both the Plaintiff and the Defendants concurred that the audited  
consolidated financial statements disclosed results that were nothing less than  
3
610  
3611  
spectacular.  
five years 1984 to 1988 inclusive,  
nine months ended September 30, 1989,  
Widdrington that he considered Castor to be a profitable and high growth investment  
After reviewing the statements for December 31, 1988  
and for the  
612  
as well as the interim unaudited statements for the  
3
3
613  
Prikopa stated in his memorandum to  
3
614  
Lowenstein pointed out that the fact that the auditors did not consider  
business.  
losses as material was a strong indication of the financial health, business viability and  
future prospects of Castor.3  
615  
[
3342] Defendants are imposing a heavier burden on Widdrington than upon  
themselves as auditors and, further, are suggesting that Widdrington should have had  
the work of verification of Castor’s financial position re-done; i.e. verify the audit work  
performed by C&L, supported by their unqualified audit opinion. This type of pretension  
3
616  
was rejected by the Court in the case of Morency v. Lafleur.  
3
3
3
3
607  
608  
609  
610  
Morrison, October 11, 2006, pp. 75-76  
Lowenstein, March 21, 2005, pp. 73-74  
Jarislowsky, April 4, 2005, pp. 15-16  
Lowenstein, March 21, 2005, pp. 134-136; Morrison, on October 5, 2006, pp. 112-113; Morrison,  
October 11, 2006, pp. 15-16  
3611  
3612  
3613  
3614  
3615  
3616  
PW-10-1  
PW-10-2  
PW-10  
PW-43-1  
PW-2404, p. 4  
Morency v. Lafleur, [2002] CanLII 7992 (QC C.S), at paras. 25-26  
500-05-001686-946  
PAGE: 677  
[
3343] Widdrington committed no fault, either in the exercise of his duties as a director  
of Castor, or in the due diligence exercised by him prior to making his respective  
investments in Castor.  
[
3344] Widdrington discharges his duty of care as director, given all the relevant  
circumstances.  
“
The duty of care requires prudence and diligence. The duty of skill also requires  
prudence; but the two duties overlap to a certain extent. However, the type of  
prudence required for the duties of care and skill are different; the duty of care  
requires prudence based on common sense, whereas the duty of skill requires  
prudence based on experience. The duty of diligence, on the other hand,  
requires the director to keep himself informed as to the policies, business and  
affairs of the company. He must be aware of the functions and acts of the officers  
and have a general knowledge of the manner in which the business is  
conducted, the source of its revenue and the employment of its resources”3  
617  
.
In determining whether directors have acted in a manner that breached the duty  
of care, it is worth repeating that perfection is not demanded. Courts are ill-  
suited and should be reluctant to second-guess the application of business  
expertise to the considerations that are involved in corporate decision making,  
but they are capable, on the facts of any case, of determining whether an  
appropriate degree of prudence and diligence was brought to bear in reaching  
what is claimed to be a reasonable business decision at the time it was  
3618  
made.  
(our emphasis)  
3
617  
618  
Wainberg and Wainberg. Duties and responsibilities of Directors in Canada, CCH Canadian Limited,  
th ed., 1987, p.18  
Magasins à rayons Peoples c. Wise [2004] 3 R.C.S.461, p. 493, [2004] CSC 68, AZ-50277289, J.E.  
004-2016  
6
3
2
500-05-001686-946  
PAGE: 678  
Th e liabilit y issu e  
[
3345] The liability issue, assessing whether C&L shall be held liable for damages  
allegedly sustained by Widdrington, necessitates determining the applicable law and its  
content and, thereafter, its application to the specific facts of the Widdrington file (i.e.  
the findings on negligence, reliance and damages).  
[
3346] The obligation to determine the applicable law results from combination of the  
following facts:  
•
•
Castor is a corporation incorporated under a New Brunswick law.  
The audits of 1988, 1989 and 1990 were related to Castor which had  
its principal place of business in Montreal, Québec, but also  
subsidiaries in various foreign countries.  
•
C&L issued the consolidated audited financial statements of 1988,  
1
989 and 1990 after having performed audit work in Montreal (relating  
to CHL and the consolidation), and Zug and Schaan (relating to the  
various subsidiaries of Castor).  
•
Stand-alone audits of certain subsidiaries of Castor were done under  
the responsibility of various C&L firms (namely Ireland and Cyprus).  
•
•
•
C&L issued valuations letters.  
C&L issued Certificates for Legal for Life Opinions.  
In the relevant years, and when he instituted his action against C&L,  
Widdrington was a resident of the Province of Ontario. Plaintiffs in the  
other court claims are resident from various countries (mainly North  
America and Europe).  
500-05-001686-946  
PAGE: 679  
The applicable law  
[
3347] Plaintiff and Defendants agree that the issue of private international law at stake  
has to be resolved by application of conflict of law rules of the Civil Code of Lower  
3
619  
, articles 6 to 8, since the relevant facts took place prior to the  
Canada (“CCLC”)  
entry into force of the Civil Code of Québec.  
6
. (…)  
The laws of Lower Canada relative to persons, apply to all persons being therein,  
even to those not domiciled there; subject, as to the latter, to the exception  
mentioned at the end of the present article.  
An inhabitant of Lower Canada, so long as he retains his domicile therein is  
governed, even when absent, by its laws respecting the status and capacity of  
persons; but these laws do not apply to persons domiciled out of Lower Canada,  
who, as to their status and capacity, remain subject to the laws of their country.  
8
. Deeds are construed according to the laws of the country where they were  
passed, unless there is some law to the contrary, or the parties have agreed  
otherwise, or by the nature of the deed or from other circumstances, it appears  
that the intention of the parties was to be governed by the law of another place;  
in any of which cases, effect is given to such law, or such intention expressed or  
presumed.  
[3348] The required analysis is a 3 step process:  
•
•
•
Step # 1: Characterization of the question or questions.  
Step # 2: Identification of the appropriate conflict of law rules to apply.  
Step # 3: Identification of the legal system that governs the question or  
questions.  
[
3349] In order to apply the appropriate conflict of law rules to them, the legal nature of  
the questions that require adjudication must be ascertained.  
[
3350] The application of the conflict of law rules to the legal questions will lead to the  
identification of the legal system that governs the questions.  
3
619  
Gauthier c. Bergeron, [1973] C.A. 77, p.79; Claude Emanuelli, Droit international privé québécois,  
Montréal, Wilson & Lafleur, 2006, par. 412, par. 429, par. 437; Jeffrey Talpis et Jean-Gabriel Castel,  
Le Code civil du Québec- Interprétation des règles de droit international privé, dans La Réforme du  
Code civil, t.3, Québec, Presses de l’Université Laval, 1993, 801, par.95; Gérald Goldstein et Ethel  
Groffier, Droit international privé, t.1, Théorie générale, Cowansville, Yvon Blais, 1998, pp.195-197  
500-05-001686-946  
PAGE: 680  
[3351] The application of the proper law to the facts leads to definite answers to the  
questions that require adjudication.  
Positions in a nutshell  
Plaintiff’s position  
[
3352] Plaintiff argues that:  
•
•
The question that requires adjudication is a matter of professional liability, a  
matter of delictual liability.  
C&L’s professional liability is to be governed by the Quebec law where C&L  
operated and committed the various faults giving rise to the claims, “lex loci  
delicti”. Knowing its consolidated audited financial statements, valuation letters  
and Certificates for Legal for Life Opinions were used and to be used, and relied  
upon, by decision-makers, lenders and investors, C&L failed to perform proper  
audits and other work, and C&L issued faulty audited consolidated financial  
statements (in 1988, 1989 and 1990), share valuation letters and Certificates for  
Legal for Life Opinions.  
•
•
It is neither a matter of status or capacity, nor a matter of contract.  
If the Court was to conclude that it is a matter of contract, Quebec law would still  
apply since evidence reveals that C&L’ s contracts with Castor were concluded in  
Montreal, Quebec3  
620  
.
Defendants’ position  
[3353] Defendants argue that:  
•
•
The question that requires adjudication is a matter of status or capacity, or a  
matter of contract.  
Castor auditors’ liability, like that of any other person holding an office in a  
corporation, is to be governed by the “lex societatis”: hence, New Brunswick law,  
since Castor was incorporated under the NBBCA.  
•
Moreover, since the law governing a contract, the “lex contractus”, also governs  
3
621  
the extra-contractual liability resulting from its faulty performance , this also  
3
620  
621  
D-4  
3
As now codified in article. 3127 of the Civil Code of Québec (« CCQ »); V. Heuzé, «La loi applicable  
aux actions directes dans les groupes de contrats» 1996 R.C. D.I.P. 243, at p. 261 ff  
500-05-001686-946  
PAGE: 681  
leads to the application of New Brunswick law, as the audit contract entered into  
3
622  
.
between Castor and C&L is governed by New Brunswick law  
•
Subsidiary, the question that requires adjudication is a matter of delictual liability.  
If an auditor’s liability is to be governed by the law of tort, the “lex loci delicti”,  
then Ontario law applies to the Widdrington case. Ontario is the locus delicti as it  
is the place of the fault, the place where Widdrington received the documentation  
3
623  
and, more importantly, the place of the prejudice, a  
and allegedly relied on it  
purely economic prejudice.  
Evidence  
[
3354] Even though Castor was a New Brunswick corporation, its principal place of  
business was located at 1801 McGill College Avenue, suite 1450, Montreal, from where  
its activities were managed and directed.  
[
3355] For the relevant years, 1988, 1989 and 1990, C&L was appointed auditor of  
3624  
Castor at the annual general meeting of shareholders . However, their remuneration  
as such was to be fixed by the Board of directors, as it appears from the shareholders  
3
625  
resolutions , and the scope of their services was, from time to time, a matter of  
discussions and agreements as it appears from a letter dated January 14, 1988, from  
Wightman to Stolzenberg3  
626  
.
The foregoing relates only to our statutory responsibilities and we are always  
prepared to extend the scope or our examination if you so desire. (…)  
In addition to conducting audits, we also offer services in many other areas, (…)  
(
Emphasis added)  
[
3356] As a matter of fact, C&L rendered a wide range of professional services to  
3627  
.
Castor  
3
622  
623  
Article 8 of the Civil Code of Lower Canada (“CCLC”) and D-4  
3
B.C. v. Imperial Tobacco Canada Ltd., [2006] BCCA 398, par. 62, 67-68 (leave to appeal denied, April  
5
, [2007], SCC no. 31715 ; Roeder v. Chamberlain, [2008] B.C.J. no. 893 (BCSC), par. 37-43; Leclerc  
v. Rouer, J.E. 2006- 1796, par. 18-21 (C.Q.)  
3
624  
625  
PW-2400-100, PW-2400-103, PW-2400-114 or D-6  
3
PW-2400-100, bates 017742 (1988); PW-2400-103, bates 017829 (1989); PW-2400-114, bates  
0
17988 (1990)  
3
626  
627  
D-4  
3
See for example the following invoices for professional services: PW-2511, PW-2519, PW-2540, PW-  
2541, PW-2670, PW-3100, PW-3104, PW-3105, PW-3106 and PW-3107  
500-05-001686-946  
PAGE: 682  
[
3357] The audit field work was performed in Montreal by the Montreal audit team or in  
Zug and Schaan by the European audit team. Except for Hunt, who was called in at the  
3
628  
last minute to help out in the 1990 audit , all members of those teams were  
3
629  
.
employees based in C&L’s Montreal office  
[
3358] The European team reported to Jean-Guy Martin, a partner of C&L based in  
Montreal who himself reported to Wightman, the engagement partner, also a partner of  
C&L based in Montreal.  
[
3359] The consolidation took place in Montreal as well as the second partner  
3630 3631  
in 1988, and by Michael  
review , which was performed by Allan Cunningham  
Hayes in 1989 and 1990, both audit partners of C&L based in Montreal  
3
632  
.
[
3360] As the last audit step, Wightman held final wrap-up meetings with Stolzenberg, at  
Castor’s offices in Montreal.  
[
3361] The audit reports and the audited financial statements were indisputably issued  
in Montreal, on C&L’s letter paper. C&L’s Montreal office address was printed on its  
3
633  
Neither the financial statements, nor the audit reports in litigation  
letterhead.  
mentioned that Castor was a New Brunswick corporation  
3
634  
.
[
3362] C&L’s purpose in performing Castor’s audits was not only to assist Castor’s  
shareholders, as a group, in their task of overseeing management. There were multiple  
purposes for doing those audits.  
[3363] The audits were performed in the following circumstances:  
•
C&L knew that it would, itself, rely on its audit work products to perform other  
tasks and issue other opinions (valuation letters and Certificates for Legal for  
Life Opinions)3  
635  
.
o In its first valuation letter issued on March 19, 1980, C&L wrote:  
You have asked us as professional accountants experienced in  
business and securities valuations for our opinion as to the fair  
market value at (…)  
Scope of Investigation  
3628  
3629  
3630  
3631  
3632  
3633  
3634  
3635  
Hunt, March 28, 1996, pp. 4-11  
PW-2619  
TPS-A-209  
Cunningham, December 13, 1996, pp. 7-8  
Hayes, October 31, 1995, pp. 8 to 16  
PW-5 tab 10, 11 and 12  
PW-5 tab 10, 11 and 12  
PW-6-1 and PW-7  
500-05-001686-946  
PAGE: 683  
In arriving at our opinion, we have reviewed and relied upon the  
consolidated financial statements of Castor for the two years  
ended December 31, 1979. We have also reviewed our working  
paper files prepared in connection with the 1979 audit3636  
o In subsequent valuation letters, namely in those that were issued between  
January 1, 1988 and October 22, 1991, C&L wrote that the purpose was  
to update previous letters relating to valuations of shares of Castor  
3
637  
prepared at various dates.  
o Based upon its audit work for each of the five previous years, C&L  
certified various items, as independent auditors of Castor, in Certificates  
for Legal for Life Opinions, namely those issued on March 6, 1989,  
3
638  
.
February 16, 1990 and February 15, 1991  
•
C&L knew that the audited financial statements, or their by-products, would be  
distributed to third parties and relied upon for the purposes of allowing and  
making investment decisions.  
o After revision by C&L, at the request of Wightman, 1 500 copies of a  
brochure which included information on the financial statements were  
3
639  
printed annually.  
o Brochures were written or translated in various languages.3640  
o In a letter dated March 8, 1991 to Stolzenberg, Wightman enclosed 100  
3
641  
whereas there are less than 14  
copies of the C&L valuation letter  
3
642  
.
directors at Castor  
o In July 1991, Wightman met with M. Gilligan and M. Martin from  
Bayerische Bank who wanted to speak to someone knowledgeable who  
had the ability to confirm the financial well-being of Castor. With them,  
3
643  
Wightman went through the various steps of C&L’s auditing process.  
3
3
3
3
636  
PW-6-1 (tab 1)  
637  
638  
639  
PW-6-1 (tab 17 to 24 inclusive)  
Part of PW-2473 (see also PW-7)  
Wightman, March 11, 2010, pp. 36-39, 69-71; PW-2372-18 (for 1988); PW-2372-19 (for 1989) and  
PW-2372-14 (for 1990)  
3640  
3641  
3642  
3643  
D-187, PW-2474-2  
PW-2679 or PW-2315  
PW-2400-114 to PW-2400-120  
Martin, November 5, 2008 and November 6, 2008; PW-72  
500-05-001686-946  
PAGE: 684  
•
C&L knew that Castor’s financing, through lenders or investors, was dependent  
on its audited financial statements, valuation letters and certificates for Legal for  
Life Opinions3  
644  
.
o In the absence of the Legal for Life Opinions prepared from time to time  
by McCarthy Tétrault for Castor, opinions largely resting upon C&L’s  
3
645  
the various companies listed in such opinions might not  
Certificates,  
have been able to invest in Castor’s shares, common or preferred, or  
3
646  
.
promissory notes  
o In a letter dated September 23, 1987, Wightman wrote to Stolzenberg:  
As you are aware, for a number of years, Castor has been issuing  
and redeeming shares on the basis of periodic valuation reports  
prepared by us.  
Because shareholders have come and gone over the years based  
on the valuations and if you intend to raise additional capital in the  
future base on these valuations….3  
647  
o In a draft letter to Stolzenberg dated December 2, 1987, prepared by  
Wightman, which is part of C&L’s working papers and which addresses  
the topic of calculations of capitalized values of common shares based on  
yields and price/earnings multiples, Wightman explained:  
Furthermore these calculations are not meant to necessarily  
establish fair market values for these shares which we calculate  
and report on separately from time to time for purposes of potential  
3
648  
increases in capital of (CHL)  
[
3364] C&L knew that the financial statements of Castor upon which they were reporting  
could affect the economic interests of the lenders and investors as well as those of  
shareholders and potential shareholders of Castor.  
[
3365] The fact that many different people (e.g., lenders, investors, etc.) would rely on  
their audit reports was not only reasonably foreseeable but was well known to C&L, and  
accepted by C&L.  
3644  
3645  
3646  
3647  
3648  
See for example: Simon, June 16, 2009, 69 to 81  
PW-2473  
Simon, June 16, 2009, pp. 75-81; PW-2473  
PW-665-2, at page 3  
PW-1053-50B-1, sequential page 166  
500-05-001686-946  
PAGE: 685  
Characterization of the question or questions  
[
3366] Characterizing implies identifying the legal category into which the case falls,  
3649  
.
taking account of its particular facts, under the Quebec civil law  
(
…) le choix du système légal que le tribunal doit appliquer au litige. À son tour,  
ce choix dépend de la qualification du problème juridique. Il est de toute première  
importance de retenir, à ce moment, que seules les lois du Québec doivent alors  
recevoir considération. (…) Comme l’écrivait avec raison le professeur Paul  
Crépeau :  
Les règles de conflits sont des règles propres à chaque système; elles ne  
doivent, elles ne peuvent être interprétées, comme d’ailleurs les règles  
internes, que par les modes d’interprétation du système juridique qui les  
3650  
a conçues  
.
[
3367] Professor Groffier describes the qualification exercise as follows:  
C’est l’étape de l’identification du problème.  
(
…) On peut dire, très généralement, qu’il s’agit d’ »une opération intellectuelle  
indépendante du conflit de lois et qui est, en réalité, l’un des facteurs  
fondamentaux du raisonnement juridique ». Le juge doit y recourir constamment,  
puisque « qualifier, c’est attribuer l’existence juridique à un être, à une chose, à  
un fait en le rangeant dans une catégorie légale. ». (…)  
L’objet de la qualification sera le plus souvent non pas le fait en lui-même mais  
bien le rapport juridique dans lequel il s’inscrit3  
651  
.
[
[
3368] Professor Emanuelli writes:  
Le choix de la règle de conflit pertinente dépend de la qualification de la question  
qui est à l’origine du conflit3  
652  
.
3369] The relevant questions therefore are:  
•
•
What is the crux of the litigation?  
What are the issues opposing the litigants?  
3
649  
Gauthier c. Bergeron [1973] C.A. 77, AZ-73011017; Claude Emanuelli, Droit international privé  
québécois, 2 ed. edition, Wilson & Lafleur, 2006, p.207  
3
650  
651  
Gauthier c. Bergeron [1973] C.A. 77, p.79  
3
ième  
Ethel Groffier, Précis de droit international privé québécois, 4  
édition, Éditions Yvon Blais  
Inc.pp.41-42  
3652  
e
Claude Emanuelli, Droit international privé québécois, 2 ed. , Wilson & Lafleur, 2006, p.209  
500-05-001686-946  
PAGE: 686  
[3370] In paragraph 118 of his re-re amended declaration, Widdrington alleges:  
As professional accountants, Defendants owed a duty to Plaintiff to conduct their  
audits, and all other professional services rendered to Castor in relation to the  
reliability of the financial statements and the valuation of Castor, in accordance  
with the Canadian Generally Accepted Accounting Principles (“GAAP”), the  
Canadian Generally Accepted Auditing Standards (“GAAS”), the Canadian  
Institute of Chartered Accountants Handbook (“CICA”) and the Code of Ethics of  
the Canadian Institute of Chartered Business Valuators (“CICBV”) namely but  
without limitation:…”  
[
3371] Widdrington is claiming damages from C&L as a result of losses he sustained  
and which he attributes to multiple C&L wrongdoings – negligent audit work, negligent  
valuation work, erroneous audit opinions, erroneous valuation opinions and erroneous  
Certificates for Legal for Life Opinions. Widdrington relied on C&L’s work in its entirety  
to invest in Castor and to act in matters of dividends issuance.  
[
[
3372] Plaintiffs in the other cases present similar claims.  
3373] In paragraph 118 of their re-re-amended particularized plea, Defendants allege:  
They deny paragraph 118 of the Plaintiffs Declaration in so far as they owed no  
duty whatsoever to Plaintiff and further add that, in any event, based upon the  
information available to them at the time they performed their work, which they  
had no valid reason to disbelieve or doubt in any way, all of their services in  
connection with Castor’s financial affairs were performed in accordance with the  
standards of their profession and the conclusions they arrived at were  
reasonable under the circumstances;  
[
3374] The gist of the matter is the liability of Defendants towards those who alleged  
they have suffered some economic damage in consequence of C&L’s negligence.  
[
3375] In Quebec civil law, any matter of liability of a wrongdoer towards those who  
have suffered some economic damage in consequence of his or her negligence is  
clearly characterized as a matter of civil liability. It is not a matter of status or  
3
653  
capacity , even though the status or capacity of the wrongdoer might be an issue of  
the matter.  
[
3376] Even though status and capacity are determined by the law under which a  
corporation has been incorporated, activities of a corporation are subject to the law  
where such activities took place.  
3
653  
Jeffrey A. Talpis, Aspects juridiques de l’activité des sociétés et corporations étrangères au Québec,  
1976] C.P. du N., para. 76, 77, 78 and 89  
[
500-05-001686-946  
PAGE: 687  
[
3377] In their treatise “La responsabilité civile”, Baudoin and Deslauriers write:  
À l’égard de son client, la responsabilité du comptable est soumise aux règles  
générales du droit des obligations (art. 1371 et s. C.c.) et donc, en fonction de la  
qualification exacte de l’engagement (mandat, contrat de service, contrat mixte  
sui generis), aux règles propres à ces différents contrats. (…) À l’égard des tiers,  
le recours tire son fondement des règles de la responsabilité extracontractuelle,  
notamment de l’article 1457 C.c..3  
654  
[
3378] In essence, the questions that require adjudication are liability issues in relation  
to work done, audit and valuation, and opinions issued by accountants, namely in the  
performance of their duties as auditors to Castor.  
Identification of the appropriate conflict of law rules  
[3379] The general Québec conflict of law rules to apply to liability issues are :  
•
•
For delictual liability - the “lex loci delicti rule”, according to section 6(3)  
CCLC.  
For contractual liability - the “lex contractus rule”, according to section  
8
CCLC.  
[
3380] There was no contract between Widdrington and C&L. Therefore the matter is  
delictual. The same conclusion applies to most other claims, if not all of them.  
Lex loci delicti  
[
3381] The general Québec conflict of law rule to apply to quasi-delictual liability issues  
is the lex loci delicti rule.  
[
3382] The lex loci delicti rule means the place where the alleged wrongdoings  
reproached acts) took place3 , the place where the wrongful activity occurred  
3656  
.
655  
(
3
654  
655  
Jean-Louis Baudoin and Patrice Deslauriers, La responsabilité civile, Volume II- Responsabilité  
e
professionnelle, 7 ed. Éditions Yvon Blais Inc. p.176  
3
e
Ethel Groffier, Précis de droit international privé, 4 ed., Éditions Yvon Blais, 1990, para. 225 at page  
2
17; Paul-André Crépeau, De la responsabilité civile extracontractuelle en droit international privé  
québécois, 1961, 39 R. du B Can, pp. 3-29; Jean Pineau and Monique Ouellette-Lauzon, Théorie de  
la responsabilité civile, Éditions Themis; Tolofson c. Jensen, [1994] 3 R.C.S. 1022, para.43,45 and  
9
4; Lister c. McAnulty, [1944] S.C.R. 317  
3656  
th  
Jean-Gabriel Castel and Janet Walker, Canadian conflict of laws, volume 1, 6 edition, Lexis Nexis, at  
page 35-18  
500-05-001686-946  
PAGE: 688  
[
3383] No doubt employees and partners of C&L who participated in the audits or  
rendered other professional services to Castor, all practising professionals in the  
province of Quebec, adjusted their conduct and estimated what obligations they might  
incur should they cause prejudice as a result of deviation from the Quebec laws.  
[
3384] The lex loci delicti rule responds to a number of sound practical considerations  
as the Supreme Court wrote in Tolofson c. Jensen:  
The rule has the advantage of certainty, ease of application and predictability.  
Moreover, it would seem to meet normal expectations. Ordinarily people expect  
their activities to be governed by the law of the place where they happen to  
be and expect that concomitant legal benefits and responsibilities will be defined  
3657  
accordingly . (emphasis added)  
[
3385] As the evidence summed-up under the subheading “evidence” of the present  
3
658  
the wrongdoings (the reproached acts : the  
section of this judgment establish,  
negligent issuance of audit reports, consolidated audited financial statements, valuation  
letters and Certificates for Legal for Life Opinions) took place in Montreal, at C&L’s  
Montreal office where the wrongful activity (issuance of various misstated and  
misleading work products) occurred.  
[
3386] Quebec law applies.  
Auditors’ Professional liability and The Quebec laws  
Applicable rules  
[
3387] Since all the relevant events took place before January 1, 1994, the Civil Code of  
Lower Canada applies according to article 85 of the Act respecting the implementation  
3
659  
of the reform of the Civil Code.  
8
5. The conditions of civil liability are governed by the legislation in force at the  
time of the fault or act which causes the injury.  
[3388] General rules of civil liability read as follows:  
1
053. Every person capable of discerning right from wrong is responsible for the  
damage caused by his fault to another, whether by positive act, imprudence,  
neglect or want of skill.  
3
657  
658  
[1994] 3 R.C.S. 1022, para. 44  
3
Facts mentioned in the other parts of the present judgment are also relevant (they all point to the  
same conclusion)  
3659  
500-05-001686-946  
PAGE: 689  
1
073. The damages due to the creditor are in general the amount of the loss that  
he has sustained and of the profit of which he has been deprived; subject to the  
exceptions and modifications contained in the following articles of this section.  
[
3389] Therefore, to succeed, a plaintiff needs only prove a fault, damage, and the  
3660  
causal connection between the fault and the damage.  
[
3390] The professional liability must be determined based on the conduct of a similar  
professional, acting reasonably, the whole as determined by the Supreme Court of  
3
661  
Canada in the case of Roberge:  
«
[TRANSLATION] A professional will therefore not incur liability unless he or she  
acts in a manner inconsistent with that of a reasonable professional.»  
[
3391] A plaintiff must demonstrate that the auditors’ fault is the logical, direct and  
3
662  
immediate cause of the damages claimed.  
[
3392] With respect to causation, Professor Jean-Louis Baudouin assesses the general  
position in Quebec concerning causation in La responsabilité civile délictuelle, as  
follows:3  
663  
:
[
TRANSLATION] The only real constant in all the decisions is the rule that the  
damage must have been the logical, direct and immediate consequence of the  
fault. This rule, stated many times by the courts, indicates a desire to limit the  
scope of causation and accept as causal only the event or events having a close  
logical and intellectual connection with the damage complained of by the victim. »  
[
3393] The auditor’s negligence will not be considered the cause of the loss if a plaintiff  
cannot prove actual reliance on the professional opinions: for example, when the  
3
664  
decision to invest was made before the professional opinions were provided to him,  
3
665  
and when  
the investments were made before the professional opinions were issued,  
the plaintiff does not prove that proper disclosure by the professionals would have  
3
666  
changed his or her decision to invest.  
3
660  
661  
(
1990), R.R.A. 303.  
3
Roberge c. Bolduc [1991] 1 R.C.S. 374 at 395, AZ-91111033, J.E. 91-412; Caisse Populaire de  
Charlesbourg v. Michaud, [1990] R.R.A. 531 (Q.C.A), AZ-90011568, J.E. 90-814.  
3
662  
Jean-Louis Baudouin and Patrice DesLauriers, La responsabilité civile, vol. II – responsabilité  
professionnelle, 7th ed., (Cowansville, Qc: Yvon Blais, 2007) paras. 2-186.  
3663  
(3rd ed. 1990), at No. 353, pp. 192-93; Roberge c. Bolduc, [1991] 1 R.C.S. 374, [1991] CanLii 83  
(
S.C.C.) at page 85.  
3
664  
Allaire c. Girard & Associés (Girard et Cie comptables agréés), [2005] QCCA 713 (CanLII), at para 53-  
5
4.  
3
665  
666  
Rouleau c. Placements Etteloc inc., [2006] QCCS 5319 (CanLII) at para. 288.  
3
Allaire c. Girard & Associés (Girard et Cie comptables agréés), [2005] QCCA 713 (Can LII), at para.  
5
6.  
500-05-001686-946  
PAGE: 690  
[
3394] Accountants and auditors are liable towards those who, with their knowledge or  
consent, make use of their work products, as the Quebec Court of Appeal said in 1990  
3
667  
in Caisse populaire de Charlesbourg c. Michaud , in 2005, in Allaire v. Girard &  
3
668  
3669  
Associés , and recently, in 2009, in Agri-capital Drummond inc. v. Mallette.  
[
3395] In Michaud3 , the Quebec Court of Appeal ruled that when auditors render  
670  
professional opinions, they assume responsibility for the consequences of their  
representations, regardless of the intended purpose of the document. According to  
authors Baudouin and Jobin, audited financial statements are not the type of  
professional opinions that are kept in the client’s drawer. Therefore, the auditor must  
carry out his obligations with care and diligence in order to be considered to have acted  
3
671  
reasonably towards third parties who rely on them.  
3
672  
has been imported into Quebec law as a  
[
3396] Defendants suggest that Hercules  
result of a comment made by the Quebec Court of Appeal in its 2005 decision of  
Savard.3  
673  
[
3397] To the extent that Defendants suggest that such an “importation” would change  
or add to the rules of civil liability provided for by article 1053 C.C.B.C., the Court  
disagrees.  
[
3398] In Savard, the appellants were trying to hold two lawyers, who did not represent  
them, responsible for their loss due to a transaction in which they were all involved. The  
first judge found that the lawyers’ liability had not been engaged, although the court  
clearly acknowledged that lawyers could be held accountable to third parties for their  
actions:  
«
Il ne fait aucune doute qu'un avis juridique erroné ou la communication de  
fausses informations dans le prospectus peut engager la responsabilité de  
3674  
l'avocat»  
.
[
3399] The Quebec Court of Appeal agreed that lawyers could be held liable toward  
third parties, based on professional faults committed in the execution of their mandates,  
although, like the first judge, it concluded that the reviewed case was not a situation  
3
667  
668  
Caisse populaire de Charlesbourg c. Michaud, [1990] R.R.A. 531 (Q.C.A.).  
2005) Q.C.C.A. 713; See also : Baudouin, La responsabilité civile, 7e édition, 2-182 à 2-190; Besner  
c. Friedman & Friedman, [2004] R.R.A. 1013 (j. Lacoursière, C.S.); BDC c. Pfeiffer, [2009] R.R.A. 848  
Juge Payette, C.S.).  
3
(
(
3
669  
670  
[
2009] QCCA 1589 at paragraphs 28-30.  
3
Caisse Populaire de Charlesbourg c. Michaud, [1990] J.Q. no. 673, 30 Q.A.C. 23, [1990] R.R.A. 531  
at p. 8  
3671  
Jean-Louis Baudoin et Pierre-Gabriel Jobin, Les obligations, 6e édition par P.-G. Jobin avec la  
collaboration de N. Vézina, 2005 at para 507.  
3672  
3673  
3674  
Hercules Managements Ltd c. Ernst and Young, [1997] 2 R.C.S. 165  
Savard c. 2329-1297 Québec inc. (Hôtel Lord Berri inc.), [2005] QCCA 705 (CanLII)  
Savard c. 2329-1297 Québec Inc., [2003] CanLII 4455 (QC C.S.) at para. 245  
500-05-001686-946 PAGE: 691  
where the lawyers’ extra-contractual liability was engaged. In reaching this conclusion,  
3
675  
the Court drew an analogy with the case of auditor’s liability and referred to Hercules  
3
676  
for the proposition that auditors can be held liable to third party users  
and Haig  
whom they know, or ought to know, might use audited financial statements.  
3
677  
[
95] (…) la responsabilité d'un comptable est retenue lorsque le lien de causalité  
entre l'acte fautif commis à l'occasion de la préparation des états financiers de  
son client et le dommage subi par un tiers découle de la connexité créée par la  
connaissance par ce professionnel du rôle ou de l'usage de ses états financiers  
par cette autre personne qui n'est pas son client. Le strict lien contractuel client-  
professionnel est ainsi dépassé par la constitution d'un rapport nouveau  
découlant de la diffusion des états financiers, créant ainsi une obligation de  
diligence pour le professionnel en faveur du tiers non client.  
[
3400] In Savard, the Quebec Court of Appeal had to deal with extra-contractual liability  
of lawyers, not auditors, and, besides, the Court specifically wrote:  
[
96] Cette approche peut sans doute être d'un certain secours à l'occasion de  
l'examen de la situation de l'avocat. Il ne faut toutefois pas perdre de vue le  
contexte particulier dans lequel évolue l'avocat en raison de l'exclusivité de  
ses services et de la confidentialité du contenu de ses communications. Dès lors,  
en règle générale, il ne se tisse pas de lien entre un avocat et un tiers.  
[
97] (…) L'avocat, comme d'ailleurs tout professionnel, n'est pas responsable de  
la perte économique subie par tous ceux qui gravitent autour de lui à quelque  
titre ou quelque occasion que ce soit. Toute autre approche aurait pour effet de  
lui imposer « a liability in an indeterminate amount for an indeterminate time to  
an indeterminate class », pour reprendre la phrase célèbre du juge Cardozo  
dans Ultramares Corp. c. Touche. (our emphasis)  
[
3401] The audit opinion differs from a legal opinion provided to a specific client for a  
specified purpose, as was the situation in the Savard case.  
[
3402] Baudouin has explained that where a document clearly states the purpose for  
which it was prepared, a third party will have difficulty in arguing that it could be used for  
3
678  
another purpose , and the Court agrees. This does not conflict with Michaud, nor  
does it place any limitation on audited financial statements in the absence of a  
documented restriction which appears therein.  
[
3403] Jean-Louis Baudouin is critical of the suggested interpretation of Savard made  
by the Defendants. In the most recent edition of his treatise on Quebec civil and  
professional liability3 , he wrote that the comments made in Savard do not change the  
679  
3675  
3676  
3677  
3678  
3679  
Hercules Managements Ltd c. Ernst and Young, [1997] 2 R.C.S. 165  
Haig v. Bamford, [1977] 1 S.C.R. 466  
Savard c. 2329-1297 Québec inc. (Hôtel Lord Berri inc.), [2005] QCCA 705 (CanLII) para. 95  
Baudouin, La responsabilité civile, 7e édition, 2-189  
Baudouin, La responsabilité civile, 7e édition, Tome 1 et Tome 2  
500-05-001686-946  
PAGE: 692  
longstanding position in Quebec that common law concepts are not applicable in  
Quebec.  
[
3404] Baudoin’s position was approved by the Quebec Court of Appeal in a 2009  
3680 3681  
and the Supreme Court rejected leave to appeal this decision. Based on  
decision  
Baudouin’s analysis of Savard , Justice Pierre Dalphond stated the following:  
[
30] En somme, la responsabilité des comptables et vérificateurs externes peut  
être engagée contractuellement envers les clients pour lesquels ils ont préparé  
des états financiers et extra contractuellement envers ceux dont ils savent qu'ils  
pourront faire usage desdits états, comme les actionnaires (La responsabilité  
e
civile, 7 éd., vol. II, Cowansville, Édition Yvon Blais de Baudouin et Deslauriers,  
paragr. 2-168 et suivants). Les auteurs Baudouin et Deslauriers écrivent aux  
paragr. 2- 186 à 2-188:  
2
-186 – Droit civil – Inévitablement, la question se pose de savoir si les  
solutions dégagées par la Cour suprême en common law sont  
directement transportables en droit civil. Un obiter de la Cour d’appel  
semble le laisser entendre. À notre avis, la réponse est négative, même  
si ces enseignements sont évidemment intéressants sur le plan du droit  
comparé. Les conclusions auxquelles arrive la Cour reposent en effet sur  
une qualification et une catégorisation des liens de droit et des  
comportements propres au système de common law, mais étrangères au  
droit civil. Ainsi, en droit civil, il n’est ni utile, ni nécessaire de référer aux  
concepts de « duty of care », de « negligent misrepresentation », de  
«
detrimental reliance », de « implied condition of merchantability », mais,  
plus simplement, aux concepts traditionnels de faute, de dommage et de  
lien causal. De plus, la traditionnelle méfiance de la common law à  
l’égard du « pure economic loss », chef de dommage largement reconnu  
au Québec, incite à une prudence accrue.  
2
-187 – Interprétation large – Le droit civil adopte donc une position  
différente, moins restrictive et, ce faisant, offre une protection accrue  
aux tiers. Certaines décisions, dont le raisonnement peut toutefois être  
rapproché de celui de common law, fondent leur analyse sur la preuve de  
la connaissance qu’avait le comptable de l’utilisation potentielle par les  
tiers des états financiers. D’autres vont plus loin et se démarquent  
nettement de la common law, en considérant que le recours est  
indépendant de la destination initiale des rapports, l’accordant ainsi à  
tous les lecteurs potentiels des états financiers. Cette responsabilité est  
le tribut à payer pour le professionnalisme de ce métier, le caractère  
technique et complexe de ses analyses et la confiance du public dans la  
qualité des actes posés.  
3
680  
Agri-capital Drummond inc. v. Mallette, [2009] QCCA 1589 at para. 30, AZ-50572993, J.E. 2009-  
1
681  
Mallette, s.e.n.c.r.l., Gratien Nolet et al. c. Agri-Capital Drummond Inc., [2010] CanLII 6341 (C.S.C.)  
668, [2009] R.R.A. 935  
3
500-05-001686-946  
PAGE: 693  
2
-188 – Illustrations jurisprudentielles – La jurisprudence offre certaines  
illustrations. Ainsi, des prêteurs, des actionnaires et des investisseurs  
éventuels ont obtenu gain de cause contre des comptables en vertu du  
régime extracontractuel.3 (our emphasis)  
682  
[
3405] As a review of the Quebec jurisprudence shows that professionals who issue an  
opinion for a specific purpose are not generally held liable towards a third party when  
such a third party was not an intended recipient of the opinion and relied on the opinion  
for a purpose that the professional could not foresee and which is different than the  
3
683  
purpose for which the opinion was prepared . This is not our case.  
[
3406] Using precedents from Supreme Court of Canada decisions in matters other than  
those arising from Québec, as well as precedents from outside Québec, always requires  
caution and foresight. The Québec Court of Appeal and the Supreme Court have issued  
that reminder many times.3  
684  
[
3407] Again, under the Quebec liability rules, to succeed a plaintiff need only establish  
3685  
a fault, a damage, and the causal connection between such fault and such damage.  
[
3408] A defendant’s liability can be limited if he or she proves that a fault by the plaintiff  
3686  
In such a case,  
is also the logical, direct, and immediate cause of the plaintiff’s loss.  
the court apportions liability based on an “assessment of the relative gravity of each  
3
687  
fault”, the analysis of which is based on “instinct and common sense.”  
[
3409] The duties of skill and diligence owed by directors, who are deemed to be  
mandataries, are set out in article 1710 of the Civil Code of Lower Canada, which reads  
as follows:  
3
3
3
682  
683  
684  
Agri-capital Drummond inc. v. Mallette, [2009] QCCA 1589 at para. 30, AZ-50572993, J.E. 2009-  
1
668, [2009] R.R.A. 935, leave to appeal at the Supreme Court of Canada dismissed: Mallette,  
s.e.n.c.r.l., Gratien Nolet et al. c. Agri-Capital Drummond Inc., [2010] CanLII 6341 (C.S.C.)  
Robinson c. Barbe, [2000] CanLII 11355 (QC.C.A.); Banque canadienne impériale de commerce, c.  
General Appraisal of Canada Limited, [1993] J.Q. no 1042 (C.A.); Caisse populaire des  
fonctionnaires c. Plante [1990] R.R.A.250 (C.A.); Placements Miracle Inc. c. Larose, [1980] C.A., 287;  
Poulin v. Prat (C.A., 1994-02-22), AZ-94011268, J.E. 94-450, [1994] 61 Q.A.C. 231, [1994] R.D.J. 301  
(
C.A.); Glegg c. Smith & Nephew Inc., AZ-50314388, [2005] CSC 31, J.E. 2005-994, [2005] 1 R.C.S.  
7
24; Bibaud c. Québec (Régie de l’assurance maladie), AZ-50256555, [2004] CSC 35, J.E. 2004-  
247, [2004] 2 R.C.S. 3; Prud’homme c. Prud’homme, [2002] 4 R.C.S. 663; Lac d’amiante du  
1
Québec Ltée c. 2858-0702 Québec inc., AZ-50100126, [2001] CSC 51, J.E. 2001-1735, [2001] 2  
R.C.S. 743  
3
685  
686  
Allaire c. Girard & Associés (Girard et Cie comptables agréés), [2005] QCCA 713 (CanLII), para 32  
Cie. d'assurance Standard Life v. McMaster Meighen, 2005 CanLII 25720 (QC C.S.), at para. 169,  
affirmed by Court of Appeal, Cie. d'assurance Standard Life v. McMaster Meighen, [2007] QCCA  
3
1
273, AZ-50451579, J.E. 2007-1897.  
3687  
Cie. d'assurance Standard Life v. McMaster Meighen, 2005 CanLII 25720 (QC C.S.), at para. 182,  
affirmed by Court of Appeal, Cie. d'assurance Standard Life v. McMaster Meighen, [2007] QCCA 1273,  
AZ-50451579, J.E. 2007-1897.  
500-05-001686-946  
PAGE: 694  
1
710. The mandatary is bound to exercise, in the execution of the mandate,  
reasonable skill and all the care of a prudent administrator.  
[
3410] Sections of the New Brunswick Business Corporations Act,3688 under which  
Castor was incorporated, set out that :  
8
0(3) A director is not liable under section 76 or 79 if he reasonably  
relies in good faith upon  
(
a)  
financial statements of the corporation represented to him  
by an officer of the corporation or in a written report of the auditor,  
if any, of the corporation fairly to reflect the financial condition of  
the corporation; or  
(
b)  
a report of a lawyer, accountant, engineer, appraiser or  
other person whose profession lends credibility to a statement  
made by him.»  
3
689  
enacted in  
[
3411] The relevant provisions of the Ontario Business Corporations Act,  
990, are virtually identical to the foregoing statutory provisions.  
1
3
690  
[
3412] Section 123.84 of the Quebec Companies Act  
sets out a presumption to the  
effect that the duty of diligence and care of directors was met by relying on expert  
reports in good faith.  
1
23.84.  
A director is presumed to have acted with appropriate skill and all  
the care of a prudent administrator if he relies on the opinion or report of an  
expert to take a decision.  
e
[
3413] According to M Paul Martel, even without such statutory provisions, it would be  
extremely surprising for a director to be deemed to have failed in his duties of diligence  
and prudence if he were to demonstrate that he had relied on the report of an expert, or  
on financial statements presented as accurate, in making a decision. He would in fact  
3
691  
have fulfilled his duty by seeking information before acting.  
e
[
3414] According to M Paul Martel, directors are not attributed a duty of control over the  
officers of the company as such; it is only when they have reason for suspicion that they  
3
692  
If they do not do so,  
are asked to investigate and, where appropriate, to intervene.  
they are then committing an error. In Blair v. Consolidated Enfield Corp.,  
3
693  
the  
3
3
3
3
688  
689  
690  
691  
S.N.B. 1981, c. B-9.1  
R.S.O. 1990, c. B.16, s.134, 135  
S.Q. 1980, c. 28, s. 14  
Paul Martel, “The Duties of Care, Diligence and Skill Owned by Directors of Federal Business  
Corporations – Impact of the Civil Code of Quebec” (2007-2008) 42 R.J.T. 233-305 at 184  
3692  
Paul Martel, “The Duties of Care, Diligence and Skill Owned by Directors of Federal Business  
Corporations – Impact of the Civil Code of Quebec” (2007-2008) 42 R.J.T. 233-305 at 154  
3693  
th  
[1995] 4 S.C.R. 5, affirmed (1993), 106 D.L.R. (4 ) 193 (Ont. C.A.)  
500-05-001686-946  
PAGE: 695  
Supreme Court of Canada reiterated the principle that directors are justified in trusting  
3
694  
the work of a corporation's representatives.  
Application of rules to facts  
[
3415] Defendants’ negligence was the cause of Widdrington’s damages because the  
Court finds that:  
•
•
Widdrington would not have invested in Castor without having reviewed  
satisfying audited financial statements and unqualified audit reports.  
Widdrington did not know that Castor’s true financial position was materially  
different than that which C&L disclosed in their professional opinions and  
there is no reason for such knowledge to be imputed to Widdrington.  
•
•
Had C&L complied with GAAP and GAAS, audited financial statements,  
unqualified audit reports, valuation letters and Certificate for legal for Life  
Opinion would never have been issued showing anything close to those in  
litigation.  
Had the audited financial statements and valuation letters revealed the  
financial situation of Castor, including proper disclosure of Castor’s financial  
position as they should have, Widdrington would not have invested and  
therefore would not have suffered a loss, even if there had been a “stampede  
effect”.  
[
3416] Defendants had the burden to prove that Plaintiff would have lost his investments  
3695  
They did not discharge said burden.  
even without their fault.  
3
696  
[
3417] In Hodgkinson v. Simms,  
in the context of an action for breach of fiduciary  
duty and under common law rules, the Supreme Court of Canada stated the following:  
«
[76] What is more, the submission runs up against the long-standing equitable  
principle that where the plaintiff has made out a case of non-disclosure and the  
loss occasioned thereby is established, the onus is on the defendant to prove  
that the innocent victim would have suffered the same loss regardless of  
the breach; see [references omitted]. This Court recently affirmed the same  
principle with respect to damages at common law in the context of negligent  
misrepresentation; see [references omitted]. I will return to the common law  
cases in greater detail later; it suffices now to say that courts exercising both  
3
694  
695  
Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5 at para. LXIX  
3
See, for example Bussières c. Compagnie d’assurance Jevco, [2002] CanLII 24454 (QC C.A.) at  
paras 9-10; See also Montpetit v. Léger, [2002] AZ-00021982 (C.S).  
3696  
Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (SCC), at para. 72 and 92, AZ-94111096, J.E. 94-1560  
500-05-001686-946  
PAGE: 696  
common law and equitable jurisdiction have approached this issue in the same  
manner. […]  
[
92] From a policy perspective it is simply unjust to place the risk of market  
fluctuations on a plaintiff who would not have entered into a given transaction but  
for the defendant's wrongful conduct. (our emphasis)  
[
3418] Even though they were made in a common law context, these remarks also  
apply in the Quebec civil context.  
[
3419] Defendants submitted the following: “Widdrington is thus in the exact position  
3697 3698  
and by the Court of Appeal in Savard : he  
described by Baudouin and Deslauriers  
invested in Castor allegedly on the basis of an audit report prepared for others and for a  
different purpose. (…) The same reasoning is applicable to the valuation letters and the  
legal-for-life certificates”. The Court disagrees with that proposition.  
[
3420] Based on the evidence, the Court finds that Widdrington invested in Castor on  
the basis of audit reports, valuation letters and Certificate for Legal for Life Opinion that  
C&L prepared namely for investment purposes, knowing that such opinions were used  
and would be used for investment purposes and agreeing that it be the case.  
[
3421] Defendants imply that because of the content of Castor Shareholders’  
Agreement, Widdrington was prevented from mitigating his damages. The Court rejects  
that proposition.  
•
•
Widdrington’s investments in Castor, both in 1989 and 1991, were made  
primarily on the faith of the accuracy and truth of the financial position of Castor,  
as reflected in the unqualified audited financial statements over the years as well  
as the correctness of C&L’s opinion as to the fair market value of Castor’s  
shares, as set out in the share valuation letters.  
Had the audited financial statements not been misstated, and had C&L’s opinion  
as the fair market value of Castor’s shares been correct, no provisions in the  
Shareholders’ Agreement would have precluded Widdrington from disposing of  
his shares in Castor, pursuant to its terms. As the evidence shows, many  
shareholders did over the years.  
[
3422] Defendants point to Widdrington’s position as a director of Trinity, and suggest  
that, in that capacity, he should have been put on notice of Castor’s undisclosed  
transactions with related parties and the non-performance of Castor’s loan portfolio.  
3
697  
698  
Jean-Louis Baudouin and Patrice Des Lauriers, La responsabilité civile, vol. II – responsabilité  
professionnelle, 7th ed., (Cowansville, Qc: Yvon Blais, 2007 paras.2-182 to 2-190  
Savard c. 2329-1297 Quebec inc. [2005] RJ.Q. 1997 (C.A.) EYB 2005-93444 (motion for permission  
to appeal at the Supreme Court of Canada dismissed)  
3
500-05-001686-946  
PAGE: 697  
[
3423] Defendants also suggest that insofar as Widdrington knew that the loans  
extended by Castor to Trinity were “bad loans”, he must have known that there might be  
other bad loans in the Castor portfolio which were not reported in Castor’s financial  
statements.  
[
3424] While Widdrington acknowledged that by the Board meeting of June 26, 1990 he  
3699  
this does not mean that he ever  
was aware that Trinity was not doing well financially,  
considered Trinity to be a bad loan. On the contrary, Widdrington testified that he was  
not so much concerned about the financial aspects of Trinity but rather the operational  
3
700  
He believed that if there were any concerns about the  
aspects of the company.  
quality of this loan, if this was an issue, it would have been discussed with the auditors  
of Castor, and if it was a “bad loan”, there would have been a bad loan provision. At the  
time, in May 1990, to put matters into perspective, Castor had assets of approximately  
$
1.6 billion.3  
701  
[
3425] It is true to say that from the beginning of his involvement in Trinity, Widdrington  
consistently voiced his concern that the company was getting involved into too many  
businesses and in businesses that it should not have been in. However, to put matters  
into perspective again, one needs to add that, at all relevant times, Widdrington  
3
702  
believed Trinity could be righted reasonably quickly.  
[
3426] Castor’s Board included international and experienced directors with diverse  
3703  
Widdrington regarded this as an opportunity for him to make a positive  
talents.  
3
704  
Prikopa described the way a director acquires his  
contribution in the future.  
3
705  
Jarislowsky explained that it is a common situation  
knowledge as a learning process.  
that the directors who compose the board of any given company have different and  
complementary strengths, and that it is normal for directors to lean on each other  
3
706  
according to their respective specialties.  
[
3427] Widdrington explained that the role of a director in general, and his role as  
director of Castor in particular, consisted in ensuring that the company had direction, a  
game plan, and the right people in place to carry it forward, and that this did not require  
3
707  
He testified that  
directors to know a great deal about the specifics of the business.  
he did not view his role as director as requiring him to examine the nuts and bolts of the  
3699  
3700  
3701  
3702  
3703  
3704  
3705  
3706  
3707  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
Widdrington, December 15, 2004  
PW-43-1.  
Widdrington, November 30, 2004  
Prikopa, January 17, 2005  
Jarislowsky, April 5, 2005  
Widdrington, November 30, 2004  
500-05-001686-946  
PAGE: 698  
business. It was up to the auditors to examine the financial details, and the auditors  
3
708  
would bring any areas of concern to the attention of the directors.  
[
3428] Through their argument, Defendants are imposing a heavier burden on  
Widdrington than upon themselves as auditors. If fact, what they are suggesting is that  
Widdrington should have questioned and verified the audit work performed by C&L,  
supported by C&L’s unqualified audit opinion. The Court cannot accept such a  
proposition.  
[
3429] Plaintiff committed no fault, either in the exercise of his duties as a director of  
Castor, or in the due diligence exercised by him prior to making his respective  
investments in Castor.  
[
3430] It was Defendants’ burden to prove a fault on the part of Plaintiff, which was the  
logical, direct and immediate cause of damages suffered by him, a burden which  
Defendants have failed to satisfy. Contributory negligence applies when the Court finds  
3
709  
This is not the case here.  
that two faults have caused the damage.  
[
3431] Defendants are liable and shall be condemned to indemnify the Plaintiff for the  
damages he has sustained.  
3
708  
709  
Widdrington, December 1, 2004  
3
See, for example Business Development Bank of Canada c. Pfeiffer, [2009] QCCS 2310 (CanLII), at  
para. 93.  
500-05-001686-946  
PAGE: 699  
Common law  
[
3432] As previously said, the Quebec civil law rules apply to this litigation and  
therefore, to decide the merits of the case, it is not necessary to discuss the content and  
the application of the common law rules.  
[
3433] In the unique and special circumstances of the Castor file however, and given  
the enormous resources that have been dedicated to this litigation, financial and others,  
the Court feels that it is her duty nevertheless to summarize the evidence adduced  
before her on that topic and to communicate what her findings would have been had  
she concluded that she had to apply the common law rules – the Court feels she owes it  
to the parties, to counsel, to the judicial community at large and to the judicial system.  
Judicial notice  
[
3434] Under article 2809 of the Civil code of Québec, and provided it has been  
pleaded, the Court may take judicial notice of the law of Ontario and New Brunswick.  
Proof of such law by expert evidence is also allowed.  
2
809. Judicial notice may be taken of the law of other provinces or territories of  
Canada and of that of a foreign state, provided it has been pleaded. The court  
may also require that proof be made of such law; this may be done, among other  
means, by expert testimony or by the production of a certificate drawn up by a  
jurisconsult.  
Where such law has not been pleaded or its content has not been established,  
the court applies the law in force in Québec.  
[
3435] The law of other provinces of Canada, New Brunswick or Ontario, is pleaded  
since the Defendants asserted that the case had to be decided on the basis of the  
common law principles, according to the Quebec conflict of law rules, in their re-  
amended defense of 1998.  
[
3436] Defendants and Plaintiff have elected to present expert evidence on the  
principles at common law: Defendants have called John Campion (“Campion”) and  
Plaintiff has called Earl A. Cherniak (“Cherniak”). Both submitted written reports in  
advance3 and testified viva voce before the Court  
3711  
.
710  
3
710  
711  
Reports of Cherniak : PW-3099 and PW-3099A ; Reports of Campion : D-660 and D-660-1  
Cherniak, February 24, 2010; Campion, August 31, 2009 and September 1, 2009  
3
500-05-001686-946  
PAGE: 700  
Expert evidence  
Who’s who  
Campion  
[
3437] Campion received his Bachelor of Arts degree from the University of Western  
Ontario in 1967 and his law degree from the University of Toronto Law School in  
9723  
712  
.
1
[
3438] Campion articled at the law firm then known as Fasken Calvin, now known as  
Fasken Martineau. In 1974, he was called to the Bar of Ontario and to the Bar of the  
3
713  
.
Northwest Territories, of which he has been a member since  
[
3439] Campion became a partner at Fasken Martineau, the legal firm where he worked  
his entire career, always as a litigator, and where he was still practicing when he  
testified before this Court.  
[
3440] Throughout his career, Campion has been involved in commercial litigation,  
including many professional liability cases.  
[
3441] With Dianna Dimmer, Campion is the co-author of Professional Liability in  
Canada published at Carswell, a treaty on professional liability, which includes a  
chapter on auditors' liability3  
714  
.
[
3442] From 1995 to 2001, Campion was a member of the board, and head of the audit  
committee of the Canadian Broadcasting Corporation.  
[
3443] In the late 90s, Campion acted as an expert before the Senate of Canada  
Banking Committee dealing with auditors' liability.  
[
3444] Campion wrote articles and lectured at professional meetings on negligent  
misrepresentation and the analysis of the principles attached thereto.  
Cherniak  
[
3445] Cherniak received his Bachelor of Arts degree from the University of Western  
Ontario and his law degree from Osgoode Hall Law School.  
[
3446] In law school, Cherniak received the gold medal in his final year, and had  
honours in all years.  
3712  
3713  
3714  
D-660-1A (curriculum vitae)  
Campion, August 31, 2009, p.23  
D-660-3  
500-05-001686-946  
PAGE: 701  
[
3447] In 1960, Cherniak was called to the Bar of Ontario, of which he has been a  
3715  
member since.  
[
3448] In the mid 60s, Cherniak became a partner at Lerners LLP, a legal firm where he  
worked his entire career, always as a litigator, and where he was still practicing when he  
testified before this Court.  
[
3449] Cherniak has been involved in cases involving professional negligence his entire  
career.  
•
He handled numerous medical negligence cases, doing a lot of work for plaintiffs  
in that field in the early days of his career.  
•
•
He handled professional liability cases for or against lawyers, sometimes  
defending lawyers and sometimes suing lawyers or law firms.  
With respect to accountant professional liability cases, he acted in two principal  
cases – one case involving KPMG that was settled just before trial, where he  
acted for KPMG, and a second case, a class action against professionals of  
multiple disciplines (namely lawyers and accountants) including Deloitte, where  
he acted for the Plaintiff and where a settlement for 85 million dollars was  
reached further to a three week settlement conference presided by Justice  
Winkler of the Ontario Superior Court. He never had an auditor’s negligence case  
at trial3  
716  
.
[
3450] Cherniak has appeared in several hundred cases before the Ontario Court of  
Appeal and approximately 35 to 40 times before the Supreme Court of Canada, without  
3
717  
.
taking account of leave applications  
[3451] Cherniak has written over a hundred papers on a variety of topics, namely:  
•
"Policy and Predictability Pure Economic Loss in the Supreme Court of  
Canada"  
•
"Two Steps Forward or One Step Back: Ends of the Crossroads in Canada", a  
paper cited twice by the Supreme Court of Canada in the Hercules decision.  
[
[
3452] Since 1982, Cherniak is a Fellow of the American College of Trial Lawyers.  
3453] Since 2006, he is a Fellow of the Chartered Institute of Arbitrators.  
3715  
3716  
3717  
PW-3098 (curriculum vitae)  
Cherniak, February 24, 2010, p. 29  
Cherniak, February 24, 2010, p. 21  
500-05-001686-946  
PAGE: 702  
[
3454] Between 1961 and 1979, Cherniak taught at the University of Western Ontario  
Law School.  
[
3455] Cherniak was elected a bencher of the Law Society of Upper Canada and sat on  
the governing body of the Law Society for eight years, from 1999 to 2007. During those  
years, Cherniak acted as chair and vice-chair of the proceedings authorization  
committee, a committee involved in the discipline process of the members of the Law  
Society.  
Experts’ opinions  
Campion  
[
3456] At common law, Campion opined that a plaintiff needs to establish five general  
3718  
:
requirements for a misrepresentation claim to be successful  
•
There must be a duty of care based on a "special relationship" between the  
plaintiff and the defendant.  
•
•
•
The representation must be untrue, inaccurate, or misleading.  
The defendant must have acted negligently in making said misrepresentation.  
The plaintiff must have relied, in a reasonable manner, on said negligent  
misrepresentation.  
•
The reliance must have been detrimental to the plaintiff in the sense that  
damages resulted.  
[
3457] Campion opined that, for the purposes of auditor’s liability cases, the first  
requirement “the duty of care based on a "special relationship" between the plaintiff and  
the defendant” has been canvassed by the Supreme Court of Canada in the Hercules  
3
719  
case, based on the two steps of the commonly known “Anns test” . He added that,  
since 1997, such canvass was repeatedly used by the Ontario courts in deciding  
3
720  
misrepresentation claim cases.  
3
718  
719  
Queen v. Cognos, [1993], 1, S.C.R., 87, at p. 110, AZ-93111008, J.E. 93-270, D.T.E. 93T-198  
Anns v. Merton London Borough Council, [1978], A.C.728; Kamloops (City) v. Nielsen, [1984], 2  
S.C.R. 2, AZ-84111034, J.E. 84-603  
3
3720  
Waxman V. Waxman [2004], 44 B.L.R. (3d) 166, at pages 308-311 (Ont. C.A.); D’Amore Construction  
th  
(
Windsor) Ltd. v. Lawyer’s Professional Indemnity Co. [2005], 249 D.L.R. (4 ) 467, at page 474 (Ont.  
Div. Ct.): Windsor Equities Ltd. v. Sentinel Hill Sales Corp., [2005] O.J. No. 1516 (S.C.J.) at  
th  
paragraph 16; Ontario Public Service Employees Union v. Ontario, [2005], 13 C.P.C. (6 ) 178, at  
th  
pages 186-188 (Ont.S.C.J.); Mantella v. Mantella [2006], 267 D.L.R. (4 ) 532, at pages 544-545 (Ont.  
th  
S.C.J.); Murphy v. BDO Dunwoody LLP [2006], 32 C.P.C. (6 ) 358, at pages 362-363 (Ont.S.C.J.);  
500-05-001686-946  
PAGE: 703  
[
3458] In most auditors’ negligence cases, said Campion, concern over indeterminate  
liability under the second component of the Anns test would serve to negate the prima  
facie duty of care. Such duty of care would only survive in exceptional cases where the  
concerns about indeterminate liability would not arise.  
[
3459] To determine in any given case whether such exceptional circumstances existed,  
Campion suggested a court would have regard to whether the defendant auditor had  
specific knowledge of the plaintiff, or a narrow class of plaintiffs, and to whether the  
auditor work product had been used for the specific purpose or transaction for which it  
had been prepared. If both criteria were to be satisfied, Campion opined that the  
potential liability could not be regarded as indeterminate. In such a case, he concluded  
3
721  
.
the duty of care would not be negated  
[
3460] Campion further opined that, of necessity, a “class of plaintiffs” had to be a  
3722  
narrow class or a limited one . He suggested that it could not be all shareholders or  
3
723  
all lenders of a company.  
He added that in an auditor’s negligence claim, the notion  
of a “limited class” did not turn on the number of members within the class but  
depended rather on whether the members were known to the defendant and had used  
the auditor work product for the specific purpose(s) for which it had been produced.3724  
[
3461] Campion wrote that the second requirement “the representation must be untrue,  
inaccurate or misleading” was largely a question of fact, which in most cases did not  
3
725  
raise any significant legal issues.  
[
3462] To satisfy the third requirement, “the defendant must have acted negligently in  
making said misrepresentation”, Campion said the plaintiff had not only to establish that  
the representation was untrue but also that the untruth was the result of a lack of  
reasonable care and skill which other competent auditors would have exercised in  
identical circumstances.3  
726  
[
3463] Campion opined that, at common law, the standard practices of a profession-  
namely GAAP and GAAS in the case of auditors- were entitled to very deferential  
treatment by the courts so that, save in exceptional circumstances where the standard  
practice was obviously deficient, a professional who had acted in conformity with the  
Dood v. RBC Dominion Securities Inc. [2006] O.J. No. 4259 (S.C.J.) at paragraphs 22-22; 1597203  
Ontario Ltd. v. Ontario , [2007] O.J. No. 2349 (S.C.J.) at paragraph 74; and McCarthy Corporation  
PLC v. KPMG LLP, [2007] O.J. No.32 (S.C.J.) at paragraphs 53-55  
3
721  
722  
D-660, at paragraphs 13-14  
3
RoyNat inc. v. Dunwoody & Co. [1993], 18 C.C.L.T. (2d) 43 (B.C.S.C.) at paragraph 22; Haig v.  
Bamford, [1977] 1 S.C.R. 466, AZ-77111040  
3723  
3724  
3725  
3726  
D-660 (additional report), at paragraph 11  
D-660 additional report, at paragraph 15  
D-660, at paragraph 6  
D-660, at paragraph 17; Guardian Insurance Co. v. Sharp, [1941] 2 D.L.R. 417 at 430 (S.C.C.); Re  
Kingston Cotton Mill Company (no.2), [1896] 2 Ch. 279 at pages 288-290 (C.A.); Re London &  
General Bank (no.2), [1894] 2 Ch. 673 at page 683 (C.A.)  
500-05-001686-946  
PAGE: 704  
standards of his profession would not be found negligent. On that topic, Campion  
referred to the reasons written by Justice Sopinka in the Supreme Court unanimous  
decision Ter Neuzen v. Korn.3  
727  
[
3464] On the fourth requirement, “the plaintiff must have relied, in a reasonable  
manner, on said negligent misrepresentation”, Campion opined that the weight of  
authority supported the view that reliance might be inferred from circumstantial  
evidence. He cited two cases into which the following had been affirmed: “the question  
of reliance is a question of fact to be inferred from all of the circumstances of the case  
3
728  
and all of the evidence adduced at trial”.  
[
3465] Campion wrote “The courts are encouraged to be sceptical of claims of reliance  
upon a misrepresentation based upon the existence of a loss which has been  
sustained”. However, in his cross-examination, he acknowledged that he had no  
3
729  
authorities to support the “encouragement to be sceptical” element of his proposition.  
Finally, Campion admitted that the burden of proof of the reliance element of a  
misrepresentation claim was exactly the same as that of other elements, the cross-  
examination on his “sceptical proposition” ending on the following question and answer:  
Q. - The point is I suggest to you the burden of proof or reliance is the same as  
negligence, the same as damages, the same as any other element of the claim;  
correct?  
A- It is.3730  
[
3466] On the fifth requirement, “the reliance must have been detrimental to the plaintiff  
in the sense that damages resulted”, Campion opined that the basic principle animating  
the assessment of damages in tort was that a plaintiff was to be put in the position that it  
3
731  
Assuming a judge was to  
would have been in if the wrong had not been committed.  
conclude there had been a negligent misrepresentation but not an intentional wrongful  
conduct (like fraudulent misrepresentation), he added that only the reasonably  
3
732  
Finally, he opined that there might be  
foreseeable losses could be recovered.  
contributory negligence, in which case apportionment of liability was expressly provided  
for in the Negligence Act.3  
733  
3
727  
728  
[1995], 3 S.C.R. 674, at page 701  
3
th  
L.K. oil & Gas Ltd. v. Canalands Energy Corp. (1989), 60 D.L.R. (4 ) 490, at page 500 (Alta C.A.);  
TWT Enterprises Ltd. v. Westgreen Developments (North) Ltd., [1992] 5 W.W.R. 341 (Alta. C.A.)  
Campion, September 1, 2009, pp.34-41  
3
3
3
3
729  
730  
731  
732  
Campion, September 1, 2009, p.41  
th  
Rainbow Industrial Caterers Ltd. v. Canadian National Railway Co. [1991] 84 D.L.R. (4 ) 291 (S.C.C.)  
th  
B.G. Checo International Ltd. v. British Columbia Hydro and Power Authority [1993], 99 D.L.R. (4 )  
5
77, at pages 593-594 (S.C.C.)  
3733  
R.S.O. 1990, c. N.1, s.3  
500-05-001686-946  
PAGE: 705  
[
3467] During his cross-examination, Campion was asked to comment on the two  
3734  
:
following extracts of paragraph 32 of the Hercules decision  
Extract # 1 relating to foreseeability of reliance  
In modern commercial society, the fact that audit reports will be relied on by  
many different people (e.g., shareholders, creditors, potential takeover bidders,  
investors, etc.) for a wide variety of purposes will almost always be reasonably  
foreseeable to auditors themselves. (…)  
Extract # 2 relating to ascertaining a prima facie duty of care  
In light of these considerations, the reasonable foreseeability/reasonable reliance  
test for ascertaining a prima facie duty of care may well be satisfied in many  
(
even if not all) negligent misstatement suits against auditors and, consequently,  
the problem of indeterminate liability will often arise.  
[
3468] About extract # 1, commenting on the proposition that in our modern society it  
would always be reasonably foreseeable to auditors that a variety of people would rely  
on their work, Campion said the proposition was rather a factual conclusion than a legal  
proposition:  
I can tell you what the law of Ontario and Canada in a common law jurisdiction is  
and this comment forms part of Justice La Forest's opinion and review, but I  
cannot say authoritatively that I have the expertise to agree with the proposition. I  
can simply say, "That's what the court said", and it's on that basis he went on  
then to make his analysis and that is not so much a legal as a factual conclusion.  
And I don't know what evidence was before the court to assist it in making that  
decision.  
So for me to agree with the proposition, which is a not so much a legal one but a  
factual one, based possibly on findings of evidence in the court, I can't give you  
an authoritative opinion one way or the other.  
it's a factual conclusion as opposed to something which forms part of the law.  
And it is a factual conclusion which the court found favour with when coming to  
its conclusions. I do not believe that it is a legal conclusion itself and therefore I  
cannot say that it forms part of the law of Ontario. You cannot go into any  
particular case and say, "That is a given conclusion which would be binding",  
because someone may lead evidence to the contrary and I simply... I'm not in a  
position as coming here to give expert testimonial on the law to give you an  
answer. In fact, I would say that since it is a finding of fact which could be  
debated in other ways in other evidence, in other cases, it is not something that  
would be binding as a matter of law.3  
735  
.
3
734  
735  
[
1997] 2 S.C.R. 165  
3
Campion, September 1, 2009, pp.29-31  
500-05-001686-946  
PAGE: 706  
[
3469] About extract # 2, commenting on the proposition that the reasonable  
foreseeability/reasonable reliance test for ascertaining a prima facie duty of care may  
well be satisfied in many, even if not all, negligent misstatement suits against auditors,  
Campion said he believed, again, it was an observation rather than the expression of a  
principle of law:  
I do not believe it is a legal conclusion in whole; it is in part. Based on the legal  
principles that it is not... It's a mixed question of fact and law and the application  
of it. So take the... in light of these considerations, the reasonable foreseeability  
and reliance tests may well be satisfied.  
The court is making an observation either upon its own understanding or on  
evidence which have been led, details which I have not read. And so he... the  
Court is not giving one and absolute finding in any event, but even assuming that  
the parenthetical even if not all negligent misstatement suits against auditors it  
leaves open the possibility that somebody with different evidence or with a  
different perspective may not agree.3  
736  
[3470] Summing up on both extracts, Campion concluded:  
I will give you this far though with respect of both of these comments. They set a  
framework that would cause anybody who wish to disagree with it to lead  
evidence to the contrary. I assume without knowing that the judge is making  
comment without evidence and it has a ring and aura of practical application of  
general knowledge that the judge is apparently applying and understanding. And  
if I were going to disagree with it as a manner of law in Ontario, I would have to  
persuade a court through evidence one way or the other whether these were  
accurate or not. But they are comments around which... because Hercules is  
such a significant case for the purposes of auditor liability one would give great  
care and concern to the statements if you were going to prove that they were not  
3737  
so.  
[
3471] During his cross-examination, Campion agreed that it was fair to say that  
auditors could agree that their audited financial statements be used for other purposes  
than the statutory audit purpose, before rendering their audit opinion or after rendering  
their audit opinion. In some exceptional circumstances, which obviously would have to  
be proved, he acknowledged a plaintiff could show that his case was falling under the  
3
738  
exception mentioned by Justice La Forest at paragraph 36 of the Hercules case.  
3
6 As I have thus far attempted to demonstrate, the possible repercussions of  
exposing auditors to indeterminate liability are significant. In applying the two-  
stage Anns/Kamloops test to negligent misrepresentation actions against  
auditors, therefore, policy considerations reflecting those repercussions should  
be taken into account. In the general run of auditors' cases, concerns over  
3736  
3737  
3738  
Campion, September 1, 2009, p.31-32  
Campion, September 1, 2009, pp.33-34  
Campion, September 1, 2009, pp.53-54  
500-05-001686-946  
PAGE: 707  
indeterminate liability will serve to negate a prima facie duty of care. But  
while such concerns may exist in most such cases, there may be particular  
situations where they do not. In other words, the specific factual matrix of a  
given case may render it an "exception" to the general class of cases in that  
while (as in most auditors' liability cases) considerations of proximity under the  
first branch of the Anns/Kamloops test might militate in favour of finding that a  
duty of care inheres, the typical concerns surrounding indeterminate liability do  
3739  
not arise.  
(our emphasis)  
[
3472] Finally, Campion opined a plaintiff could have a cause of action against an  
auditor, at common law, provided such a plaintiff discharged his burden of proof to  
3
740  
establish the five requirements of his negligent misrepresentation claim.  
Cherniak  
[
3473] Cherniak, who testified after Campion and who had the opportunity to read  
3741  
Campion’s testimony in advance , confirmed that he had no disagreement with  
Campion’s testimony on the following subjects:  
•
•
The sources of the common law.  
The general description of the development of the Canadian common law with  
respect to economic loss or negligent misstatement.  
•
The five requirements under the case Queen vs. Cognos Inc. in a  
misrepresentation claim.  
[
3474] Cherniak said that the principal issue was the issue of indeterminacy in relation  
to the duty of care requirement.  
[
3475] He recognized that this issue was often stated in the words of Justice Cardozo in  
3742  
the Ultramares case , where the latter warned against liability being held for an  
indeterminate amount, to an indeterminate class and for an indeterminate period of  
time, but he disagreed with the following assertion of Campion: “The plaintiff's reliance  
must be the end and aim of the transaction in which the statement was made, the  
3
743  
proximity must be so close as to approach that of "contractual privity".  
[
3476] Cherniak opined that it is not necessary that a plaintiff's reliance be the “end and  
aim of the transaction”. He said it is only necessary to have used the work product for  
the same purpose for which it was prepared or if the work product was prepared for  
3739  
3740  
3741  
3742  
3743  
[
1997] 2 S.C.R. 165  
Campion, September 1, 2009, pp. 61-66 and PW-3064  
Cherniak, February 24, 2010, p.35  
Ultramares Corp, v, Touche [1931], 255 N.Y. 170, 174 N.E. 441, 74 A.l.R. 1139 (U.S. N.Y. Ct. App.)  
Cherniak, February 24, 2010, p. 40-41  
500-05-001686-946  
PAGE: 708  
several purposes, for one of those purposes. Cherniak added that there was nothing in  
jurisprudence to support that a plaintiff's reliance must be the “end and aim of the  
transaction”.3  
744  
[
3477] Cherniak affirmed that if the sentence "The proximity must be so close as to  
approach that of "contractual privity", was the law of the United States, it was surely not  
3
745  
of the  
with the law of Canada. Cherniak said the same applied to the Glanzer case  
1
920s (United States case also).  
[
3478] Cherniak testified that two criteria had to be analysed at the first stage of the  
Anns’ test: reasonable foreseeability and proximity.  
[
3479] To establish a duty of care at common law, he explained that the following three  
elements had to be shown:  
•
•
The plaintiff is complaining of a harm that was reasonably foreseeable.  
The relationship of the plaintiff with the defendant is of sufficient proximity such  
that it is just and fair to hold the defendant subject to a duty of care.  
•
There are no residual policy reasons, concerned with the effect of recognizing a  
duty of care on other legal obligations, the legal system and the society more  
generally, for declining to impose such a duty.  
[
3480] Under the law of Ontario, at common law, he said a duty of care may lie on the  
part of an auditor where the plaintiff was known to the auditor (or the class of such  
plaintiffs was known to the auditor) and where the auditor’s statement was used for the  
purpose for which it was made, those circumstances being questions of fact in any  
given case.  
[
3481] He cited cases from Ontario post Hercules, where the courts found a duty of care  
between auditors and plaintiffs where there was no contractual relationship or where the  
3
746  
.
courts recognized that possibility  
[
3482] He opined that the purpose (or purposes) of the auditor work product(s) was the  
key element in the determination of an auditor’s duty of care and that the identification  
of any such purpose was a question of fact in any given case. He wrote:  
In my opinion, a court in Ontario considering the purpose of audit reports and  
audited financial statements will always consider the factual matrix of the  
case to determine what purpose or purposes were intended for the audit  
3744  
3745  
3746  
Cherniak, February 24, 2010, pp.40-42  
Cherniak, February 24, 2010, p. 43  
McKenzie Financial Corp. V. McRae [1998], 81 O.T.C. 321 (Gen. Div.); Canadian Imperial Bank of  
Commerce v. Deloitte & Touche [2003] Carswell Ont 1814; CC&L Dedicated Enterprise Fund  
(
Trustee of) v.Fisherman [2001] 18 B.L.R. (3d),260 (Ont.S.C.J.)  
500-05-001686-946  
PAGE: 709  
reports and the financial statements. The answer to that factual question, in turn,  
will affect the determination of the duty of care.3 (our emphasis)  
747  
[
3483] Cherniak wrote “whether it is reasonable to rely on audit reports or audited  
financial statements is a different question than whether such reports or statements can  
give rise to liability. The first is a factual question that, in my opinion, Ontario courts  
would answer by having regard to the commercial context of the case. The second is a  
3
748  
question of law that requires applying legal standards to the facts as found” . The  
Court agrees.  
Analysis  
[
3484] If she had come to the conclusion that the common law rules applied to this  
litigation, the Court would have reviewed the evidence, and Widdrington’s claim,  
through the five requirements applicable to a misrepresentation claim, as described by  
Campion and agreed to by Cherniak.  
[
3485] Having said earlier that she would have come to the same conclusion as the one  
she has reached under the Civil Code of Québec, and to explain summarily such a  
conclusion, the Court now sums up her analysis through these five requirements.  
First requirement –the duty of care  
[
3486] As the Supreme Court wrote in Hercules Managements Ltd. v. Ernst & Young  
3
749  
the existence of a duty of care in tort is to be determined through an  
(
“Hercules”),  
application of the two-part test enunciated in Anns v. Merton London Borough  
3
750  
Council , [1978] A.C. 728 (H.L.), at pp. 751-52:  
First one has to ask whether, as between the alleged wrongdoer and the person  
who has suffered damage there is a sufficient relationship of proximity or  
neighbourhood such that, in the reasonable contemplation of the former,  
carelessness on his part may be likely to cause damage to the latter — in which  
case a prima facie duty of care arises. Secondly, if the first question is answered  
affirmatively, it is necessary to consider whether there are any considerations  
which ought to negative, or to reduce or limit the scope of the duty or the class of  
person to whom it is owed or the damages to which a breach of it may give  
3751  
rise . (our emphasis)  
3747  
3748  
3749  
3750  
3751  
PW-3099A, at paragraph 32  
PW-3099A, at paragraph 35  
[
[
[
1997] 2 S.C.R. 165  
1978] A.C. 728 (H.L.), at pp. 751-52  
1997] 2 S.C.R. 165, paragraph 19  
500-05-001686-946  
PAGE: 710  
[
3487] This basic approach has repeatedly been accepted and endorsed by the  
3
752  
Supreme Court of Canada . In his 2007 report, Cherniak opines that the reformulation  
3
753  
.
of the test into three parts from two did not change the test in its substance  
Campion shares this conclusion, and the Court agrees.  
F irst part of the test : relationship of proximity  
[
3488] The first part of the test demands an inquiry into the relationship between  
Widdrington and C&L - In the reasonable contemplation of C&L, could carelessness on  
their part cause damage to Widdrington?  
[
3489] The Court has to investigate whether C&L and Widdrington can be said to be in a  
relationship of proximity or neighbourhood.  
[
3490] As Justice La Forest said in Hercules, writing for the Court: “the term “proximity”  
itself is nothing more than a label expressing a result, judgment or conclusion; it does  
not, in and of itself, provide a principled basis on which to make a legal  
determination”3  
754  
.
[
3491] A relation of proximity or neighbourhood exists if the circumstances of the  
relationship between a plaintiff and a defendant are of such a nature that the defendant  
may be said to be under an obligation to be mindful of the plaintiff’s legitimate interests  
in conducting his or her affairs. There is a relation of proximity or neighbourhood when  
two criteria relating to reliance may be said to exist on the facts:  
•
the defendant ought reasonably to foresee that the plaintiff will rely on his or her  
representation; and  
•
reliance by the plaintiff would, in the particular circumstances of the case, be  
reasonable.  
[
3492] “In modern commercial society, the fact that audit reports will be relied on by  
many different people (e.g., shareholders, creditors, potential takeover bidders,  
investors, etc.) for a wide variety of purposes will almost always be reasonably  
3
755  
foreseeable to auditors themselves”, as Justice La Forest wrote in Hercules.  
3
752  
Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R.  
2
28; Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; London  
Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299; Winnipeg Condominium  
Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85.  
PW-3099A, at paragraph 18  
3753  
3754  
3755  
[
1997] 2 S.C.R. 165, at paragraph 23  
1997] 2 S.C.R. 165, at paragraph 32  
[
500-05-001686-946  
PAGE: 711  
[
3493] Above and beyond this remark of Justice La Forest, and to determine what is or  
3756  
is not foreseeable in any given situation, the facts of the case are highly relevant.  
[
3494] In this case, and through their audit partner Wightman, C&L had knowledge of  
Castor’s business and of the limited “investment club group of persons” that interacted  
with Castor.  
[
3495] In this case, and as explained under the heading “independence” of the present  
judgment, Wightman was a promoter of Castor’s affairs.  
[
3496] In this case, and as the Court previously enunciated, the purposes of C&L’s work  
products were multiple.  
[
3497] The audits of Castor performed by C&L had more than one purpose. Above and  
beyond any statutory audit requirements, in doing their annual audit of Castor, C&L  
were pursuing the following tasks:  
•
To produce a tool that would be relied upon to assess the fair market value of  
Castor’s shares and to issue valuation letters serving to attract and convince new  
investors to join the “investment club” of Castor or to retain the actual members  
of said “investment club”.  
•
To produce a tool to be relied upon for the issuance of an annual Certificate for  
Legal for Life Opinion and to attract investors and to convince investors of  
Castor’s creditworthiness.  
[
3498] The issuance of the valuation letters also had more than one purpose. Even  
though those letters might have had some connection with the shareholders’  
agreement, they were primarily issued as a professional opinion on the fair market value  
of Castor’s shares for treasury issuance purposes, to be used by those who were  
approached to invest in Castor’s shares.  
[
3499] One of the objectives pursued through the issuance of Legal for Life Opinions, as  
mentioned by Simon during his testimony, was to establish Castor’s creditworthiness in  
the eyes of the potential investors.  
[
3500] In those circumstances, C&L ought reasonably to have foreseen reliance by third  
parties on their opinions and representations (audit reports, valuation letters and  
Certificates for Legal for Life Opinion).  
[
3501] In fact, Widdrington reasonably relied on C&L’s work products (audit reports,  
consolidated audited financial statements, valuation letters and Certificates for Legal for  
Life Opinions) as the Court explained earlier in the present judgment, under the heading  
“
reliance”.  
3756  
[1997] 2 S.C.R. 165, at para graph 28  
500-05-001686-946  
PAGE: 712  
[
3502] There is no doubt that a relation of proximity or neighbourhood existed between  
Widdrington and C&L.  
S econd part of the test : policy considerations  
[
3503] In the second part of the test, the Court has to ask herself whether, in the  
particular circumstances of this case, there are considerations which ought to negate or  
limit the scope of C&L’s duty of care and the class of persons to whom it is owed or the  
damages to which a breach of such duty may give rise.  
[
3504] The fundamental policy consideration that must be addressed centres around the  
possibility that C&L might be exposed to “liability in an indeterminate amount for an  
indeterminate time to an indeterminate class”. Concerns over indeterminate liability  
generally serve to negate a prima facie duty of care in auditors’ liability cases.  
[
3505] An important case, cited by both experts, is CC & L Dedicated Enterprise Fund  
3757  
Trustee of) v. Fisherman , in which a class action was authorized based on a finding  
(
that a duty of care was owed by the auditors not only to the investors who initially  
purchased shares in the initial public offering, but also to the secondary-market  
purchasers for whom reliance was also reasonably foreseeable to Defendants. As  
Campion agreed, this case shows that a potential class of plaintiffs cannot be  
3
758  
In that case, even though the  
considered indeterminate simply because it is large.  
class of plaintiff was large and comprised members not specifically known to the  
defendants, the class was nonetheless sufficiently delimited because the auditors knew  
this group would rely on their opinions.  
[
3506] Justice La Forest mentioned in the Hercules decision, “while such concerns may  
exist in most such cases, there may be particular situations where they do not. In other  
words, the specific factual matrix of a given case may render it an “exception” to the  
general class of cases in that while (as in most auditors’ liability cases) considerations  
of proximity under the first branch of the Anns/Kamloops test might militate in favour of  
finding that a duty of care inheres, the typical concerns surrounding indeterminate  
liability do not arise”3 (our emphasis).  
759  
[
3507] On the facts of the Hercules case, Justice La Forest:  
•
Described the purpose as “precisely, to assist the collectivity of  
shareholders of the audited companies in their task of overseeing  
management”3  
760  
3757  
3758  
3759  
3760  
[
2001] 18 B.L.R. (3d) Ont. S.C.J. (Mondor)  
D-660A, paragraph 13  
[
1997] 2 S.C.R. 165, at paragraph 36  
[
1997] 2 S.C.R. 165, at paragraphs 49 and 53  
500-05-001686-946  
PAGE: 713  
•
Rejected the submission that, in addition to the statutorily mandated  
purpose, the audits had been prepared for the purpose of providing the  
appellants with information on the basis of which they could make  
3
761  
.
personal investment decisions  
•
•
Assessed that, in fact, the audit reports had not been prepared in order to  
assist the appellants in making personal investment decisions or, indeed,  
3
762  
.
for any purpose other than the standard statutory one  
Established that it followed “that the only purpose for which the 1980-82  
reports could have been used in such a manner as to give rise to a duty of  
care on the part of the respondents is as a guide for the shareholders, as  
3
763  
.
a group, in supervising or overseeing management”  
•
And concluded that “even though the respondents owed the appellants  
qua individual claimants) a prima facie duty of care both with respect to  
(
the 1982-83 investments made in NGA and NGH by Hercules and Mr.  
Freed and with respect to the losses they incurred through the devaluation  
of their existing shareholdings, such prima facie duties are negated by  
policy considerations which are not obviated by the facts of the  
case”3 (our emphasis).  
764  
[3508] Justice La Forest concluded accordingly because, as he said, based on the facts  
of the Hercules case “to come to the opposite conclusion on these facts would be to  
expose auditors to the possibility of indeterminate liability, since such a finding would  
imply that auditors owe a duty of care to any known class of potential plaintiffs  
regardless of the purpose to which they put the auditors’ reports. This would amount to  
an unacceptably broad expansion of the bounds of liability drawn by this Court in Haig,  
supra.”3  
765  
3
766  
and agreed to by Campion,3767 financial  
[
3509] As was explained by Cherniak,  
statements can be prepared for more than one purpose.  
[
3510] Castor required audited financial statements in order to obtain and maintain the  
financing required to meet its current obligations and to enable its business to expand.  
Defendants were well aware of this purpose, and issued its unqualified opinions with full  
knowledge of the various ways in which they were being used in pursuit of this purpose,  
including:  
3761  
3762  
3763  
3764  
3765  
3766  
3767  
[
[
[
[
[
1997] 2 S.C.R. 165, at paragraphs 50, 52 and 54  
1997] 2 S.C.R. 165, at paragraph 50  
1997] 2 S.C.R. 165, at paragraph 51  
1997] 2 S.C.R. 165, at paragraph 64  
1997] 2 S.C.R. 165, at paragraph 64  
Cherniak, February 24, 2010, pp. 78-79.  
Campion, September 1, 2009, pp. 52-53  
500-05-001686-946  
PAGE: 714  
•
Providing the audited financial statements to lending institutions pursuant to  
covenants in loan agreements. Being Castor’s auditor since its inception, and  
reviewing its loan documentation, C&L knew that Castor had to provide audited  
financial statements to its lenders as a condition of its financing agreements and  
also knew the identity of such lenders, as appears from the lists of liabilities in the  
AWPs and confirmations. In fact, C&L acknowledged as much in a letter to  
3
768  
in which they represented that CHI’s lenders relied on  
Revenue Canada,  
Castor’s audited financial statements as the basis for their financing decision and  
made representations that the improved liquidity on such statements due to the  
$
100M debenture transaction made it easier for Castor to obtain financing from  
3769  
to explain the  
lenders. C&L also communicated directly with Castor’s lenders  
financial statements, thereby providing them with further comfort to extend credit  
and continue lending. For example, in 1991, Wightman met with Norman Martin  
of BV Bank and reviewed the audited financial statements in detail with this  
lender, which contributed to their decision to continue to extend credit to Castor.  
3
770  
•
•
Distributing the audited financial statements to current and potential shareholders  
3771  
and depositors in order to solicit investments.  
Wightman knew that this  
information was distributed by way of Castor’s brochure, which he reviewed to  
3
772  
ensure the accuracy of the financial information contained therein.  
He also  
3
773  
kept his own stack of these materials , and admitted to having sent them to  
3
774  
as well as to having requested that such  
potential depositors on occasion  
information be sent to potential depositors.  
3
775  
Using the audited financial statements as a basis for determining the fair market  
value of Castor’s shares, which in turn, were provided to current and potential  
3
776  
shareholders to set the price for the issuance and redemption of shares.  
Defendants intended their opinion in these letters to be relied upon : they qualify  
an opinion given in another letter as being unreliable by referring to the share  
3
777  
Even though Wightman  
valuation letters, as an example of a reliable opinion.  
denied knowing that the letters were being used to solicit investments, he could  
not provide an alternative explanation as to why Castor was provided with  
3
768  
PW-60; PW-1492-3A, p. 3  
3
3
3
3
3
769  
Wightman, March 11, 2010, pp. 72-75; PW-3107, PW-2372-28, PW-2496  
PW-72; Martin, November 5, 2008, pp. 33-34  
770  
771  
772  
773  
Wightman, October 20, 1995, pp. 114-115  
Wightman, March 11, 2010, pp. 36-38  
Although Wightman does not outright admit this, the fact that he explained this status to a party that  
did not require this status to invest indicated that he knew it was being used to indicate a safe  
investment from a profitable company.  
3774  
3775  
3776  
Wightman, February 10, 2010, p. 131  
Wightman, June 20, 1996, p. 58; Simon, May 1, 2009, pp. 154-155; PW-2372-32-1; PW-2372-32-2  
PW-665-2; PW-1053-50A, sequential pp. 23, 25-26 (Shows National Trust purchasing shares at the  
price of the most current valuation letter)  
3777  
PW-1053-50B-1, seq. p. 166  
500-05-001686-946  
PAGE: 715  
multiple copies of the valuation letters, when there were always less than 14  
3
778  
C&L knew that Castor intended to increase its capital base and to  
directors.  
attract more European individual depositors as opposed to banks: those facts  
3
779  
were noted by C&L in their audit working papers.  
•
Using the audited financial statements as a basis for the issuance of legal-for-life  
opinions, which in turn, were used to solicit specific investments from pensions,  
3
780  
as well as a general marketing tool to show  
trusts, and insurance companies  
Castor as a safe investment to current and potential shareholders, investors,  
3
781  
lenders and depositors.  
[
3511] Each case must be looked at on its facts to determine whether indeterminacy is  
truly a concern in the situation.  
[
3512] In this second part of the test, the Court must enquire, when deciding whether or  
not policy considerations ought to negate or limit C&L’s prima facie duty towards  
Widdrington, if C&L had knowledge of the identity of Widdrington (or of the class of  
plaintiffs) and what use was made of the work products at issue.  
[
3513] The facts of the case are the cornerstone of such an enquiry. As explained by  
Cherniak, «there is no substitute for a close examination of the facts to determine  
auditor’s liability in general and whether indeterminacy considerations do arise and  
whether they are negatived.»3  
782  
[
3514] If the facts reveal that indeterminacy is not an issue, such as when the plaintiff  
or class of plaintiffs) is known to the defendant and the statement is relied upon for the  
(
purpose for which they were prepared, there is no reason not to hold an auditor liable  
for the reasonably foreseeable consequences of a third party’s reasonable reliance on  
his negligently executed work.  
[
3515] Based on the facts of the Castor file, the Court concludes that the Castor case is  
an “exception” to the general class of auditors’ liability cases in that she finds, as Justice  
La Forest wrote, that “the typical concerns surrounding indeterminate liability do not  
arise”.  
[
3516] Knowledge of the plaintiff (or of a limited class of plaintiffs) and use of a work  
product for a purpose for which it was prepared are significant factors serving to obviate  
concerns over indeterminate liability.  
3778  
3779  
3780  
3781  
3782  
PW-2315  
PW-2677  
Wightman, October 20, 1995, pp. 160-161  
Simon, June 16, 2009, pp. 75-76  
Cherniak, February 24, 2010, pp. 68-69  
500-05-001686-946  
PAGE: 716  
the presence of such factors in a given situation will mean that worries stemming  
from indeterminacy should not arise, since the scope of potential liability is  
sufficiently delimited. In other words, in cases where the defendant knows the  
identity of the plaintiff (or of a class of plaintiffs) and where the defendant’s  
statements are used for the specific purpose or transaction for which they were  
made, policy considerations surrounding indeterminate liability will not be of any  
concern since the scope of liability can readily be circumscribed. Consequently,  
such considerations will not override a positive finding on the first branch of the  
Anns/Kamloops test and a duty of care may quite properly be found to exist.3  
783  
It should be equally clear, however, that in certain cases, this problem does not  
arise because the scope of potential liability can adequately be circumscribed on  
3784  
the facts.  
[
3517] Defendants knew that a distinct group was relying on their professional opinions.  
In the words of Wightman, Castor was «a private investment club», comprised of closely  
3
785  
Being a member of this  
connected high net worth shareholders and lenders.  
investment club, Widdrington was clearly part of the class for whose benefit C&L knew  
3
786  
3787  
the share valuation letters and indirectly,  
that the audited financial statements,  
3
788  
were prepared. Wightman’s acknowledgment of this limited  
the legal for life opinions  
group shows that the class to which C&L owed a duty, and who was reasonably in their  
contemplation in the execution of their mandate, is not indeterminate.  
[
3518] As a consequence of his significant involvement with Castor, Wightman was  
aware of the identity of the investment club members. As was explained by Ron Smith,  
Wightman was viewed as a key ally in Castor’s promotion among the members of this  
club with whom he interacted at the cocktails and dinners organized in conjunction with  
3
789  
and with whom he discussed the  
the shareholders’ and directors’ meeting,  
company’s financial position.3  
790  
[
3519] Wightman’s participation in the promotion of C&L’s professional opinion among  
these class members further militates against a finding of indeterminacy. Wightman  
viewed the investment club to be such a tight-knit group that he even justified the  
decision to use a SCNIA, rather than a GAAP mandated SCFP in the audited financial  
statements: in his view, if any shareholder or lender in the club wanted to see the  
SCFP, he or she would have phoned and the change would have been made:  
3
3
3
783  
784  
785  
[
1997] 2 S.C.R. 165, at paragraph 37  
1997] 2 S.C.R. 165, at paragraph 44  
[
Wightman, February 8, 2010, p. 173; February 11, 2010, p. 205; October 11, 1995, pp. 60-61.  
References to the investment club can be found in the working paper, e.g. PW-1053-50B-2, seq. p.  
5
85  
3
786  
787  
Wightman, October 20, 1995, pp. 114-115  
3
See question 65; See also PW-665-2 (p. 3, “Other considerations”); Wightman, August 13, 1996, pp.  
8
8-89  
3788  
3789  
3790  
See question 56; PW-1053-6, seq. p. 103  
R. Smith, May 14, 2008, pp. 110-111; PW-2434, PW-2435, PW-2436  
R. Smith, May 14, 2008, p. 111  
500-05-001686-946  
PAGE: 717  
“
CASTOR was such a closely held and closely followed company that I felt that if  
any of the major investors or lenders could have asked CASTOR for that  
Statement and CASTOR might have in fact changed their presentation  
accordingly if they felt that somebody was interested.” 3  
791  
[
3520] This justification is an express acknowledgement of the limited class that, to  
C&L’s knowledge, was receiving and was relying on Castor’s financial statements,  
which included both the lenders and investors.  
[
3521] The distribution to, and the reliance on the audited financial statements by  
shareholders, investors and lenders for various financing purposes, was common  
3
792  
3793  
3794  
and Hunt, who  
knowledge to the audit staff, including Wightman,  
Grzelak  
noted such a purpose in the Audit Planning Memo for 1990, on the first day working on  
the audit.3  
795  
[
3522] Wightman also knew that Castor’s brochures, which included the five-year  
summary of the audited financial statements and referenced Castor’s legal for life  
status, were being used by lenders and investors contemplating doing business with  
3
796  
3797  
In fact, he kept such brochures in his office and on occasion, distributed  
Castor.  
3
798  
them to third parties contemplating doing business with Castor.  
[
3523] Unlike the financial statements in Hercules, the Castor financial statements were  
not prepared for a statutory audit since Castor was not obliged by statute to produce  
audited financial statements.  
[3524] Castor’s financial statements were prepared by C&L for other purposes which  
C&L was aware of and approved of. The financial statements were used in share  
valuation letters and Legal for Life Certificates, they were included in information  
brochures, they were distributed to actual and potential investors and creditors (some of  
whom were directly solicited by Wightman himself), they were used in tax planning and  
structuring including the incorporation of C.H. (Ireland) Inc. by Wightman, and they  
served in communications with investors and lenders. Wightman considered Castor to  
be an investment club and the audited financial statements were distributed to and  
relied upon by the members and the potential members of the club.  
3
791  
792  
Wightman, September 13, 1996, pp. 47-48  
3
PW-2695, wherein Wightman recommends that Castor follow a new presentation, because «Castor’s  
statements are widely distributed»  
3793  
3794  
3795  
3796  
Grzelak, October 22, 1996, pp. 196-201  
Hunt, March 28, 1996, pp. 86-91  
PW-1053-16, seq. p. 265  
PW-1057-1, PW-1057-2, PW-1057-3; Wightman, March 11, 2010, pp. 36-38; Wightman, September  
1
3, 1996, pp. 109-110  
3
797  
798  
Wightman, March 11, 2010, p. 38  
3
Wightman, February 10, 2010, p. 131  
500-05-001686-946  
PAGE: 718  
[
3525] C&L knew that the share valuation letters were being used by current and  
potential investors to justify the share price for the frequent capital subscription  
requests, and that «shareholders were coming and going» based on the prices set in  
the valuation letters.  
[
3526] C&L was aware of the impact of the Legal for Life designation, which enabled  
Castor to attract investments from insurance companies and pension funds requiring  
such a status, as well as in general, by providing comfort to investors as to the safety of  
the investment.  
[
3527] C&L knew of an identifiable class of plaintiffs and of the various uses those  
plaintiffs would make of their work products (audit reports, consolidated audited financial  
statements, valuation letters and Certificates for Legal for Life Opinions).  
[
3528] Only one conclusion can be reached: by their course of conduct, C&L consented,  
if not expressly at least implicitly, to the use of their work products for those purposes.  
[
3529] Moreover, through the content of the various valuation letters that they issued,  
C&L associated themselves with Castor’s information, without expressing any  
limitations or reserves, while if they wanted to exclude or limit their liability, they had to  
according to the professional standards that were applicable to them as accountants  
and auditors.  
3
799  
[
3530] Concerns over indeterminate liability have sometimes been overstated.  
In  
fact, in the Castor environment, C&L never was exposed to liability in an indeterminate  
amount for an indeterminate time to an indeterminate class. Through their audit partner  
Wightman, who was actively involved in the development of Castor’s business since  
Castor’s inception and until its demise, they were always in a position to foresee what  
they were getting themselves into, whether they acted upon it or not.  
[
3531] On the facts of this case, as described throughout the present judgment, the  
Court finds that deterrence of negligent conduct is an important policy consideration  
3
800  
.
with respect to auditors’ liability that needs to be taken into consideration.  
3
799  
800  
[
1997] 2 S.C.R. 165, at para.33  
1997] 2 S.C.R. 165, at para.35  
3
[
500-05-001686-946  
PAGE: 719  
Second requirement –untrue, inaccurate, or misleading  
representation  
[
3532] This requirement raises issues of fact that have been dealt with under the  
headings of the present judgment to which the Court refers, having nothing else to add.  
Third requirement - defendant must have acted negligently in  
making said misrepresentation  
[
3533] Again, this requirement raises issues of fact that have been dealt with under the  
headings of the present judgment to which the Court refers, having nothing else to add.  
Fourth requirement - plaintiff must have relied, in a reasonable  
manner, on said negligent misrepresentation  
[
3534] Under the heading “Reliance” of the present judgment, the Court explained why  
she finds it was reasonable for Widdrington to rely on the Defendants’ work products.  
[
3535] In light of Campion’s cited authorities that “the question of reliance is a question  
of fact to be inferred from all of the circumstances of the case and all of the evidence  
3
801  
adduced at trial” , these explanations of the Court are the answer to the fourth  
requirement.  
Fifth requirement- the reliance must have been detrimental to  
the plaintiff in the sense that damages resulted  
[
3536] This requirement raises issues of fact that have been dealt with under the  
heading “The damages issue” of the present judgment to which the Court refers.  
[
3537] According to the evidence that was adduced by Cherniak and Campion before  
the Court regarding damages issues at common law, there is nothing contradictory to or  
substantially different from the legal principles she did apply under the Civil Code of  
Québec.  
3
801  
L.K. oil & Gas Ltd. v. Canalands Energy Corp. [1989], 60 D.L.R. (4th) 490, at page 500 (Alta C.A.);  
TWT Enterprises Ltd. v. Westgreen Developments (North) Ltd., [1992] 5 W.W.R. 341 (Alta. C.A.)  
500-05-001686-946 PAGE: 720  
[
3538] For example, there is no issue of contributory negligence which could possibly  
impact differently on the Plaintiff’s capacity to recover.  
•
In Ingles v. Tutkaluk Construction Ltd., the Supreme Court of Canada stated the  
principle of joint and several liability at common law as follows:  
«
The purpose of a regime which imposes joint and several liability  
on multiple defendants is to ensure that plaintiffs receive actual  
compensation for their loss. Given the wording of the Ontario  
Negligence Act, I can see no reason to deny this benefit to a  
plaintiff who contributes to his or her loss. His or her responsibility  
for the loss is accounted for in the apportionment of fault. There is  
no reason to account for it again by denying him or her the benefit  
of a scheme of joint and several liability when the wording of the  
legislation does not intend it to be so.3  
802  
3
803  
section 2(2) of the Alberta  
•
•
In the case of Campbell v. Calgary Power Ltd.,  
3
804  
Contributory Negligence Act, , which is identical to section 2(2) of the New  
Brunswick statute in all material aspects, was held to expressly preserve the  
traditional joint and several liability.  
A similar conclusion was reached by the Saskatchewan Court of Queen’s Bench  
3
805  
where legislation virtually identical to that of New  
in Housen v. Nikolaisen,  
Brunswick, Ontario and Alberta, was interpreted.  
3802  
3803  
3804  
3805  
Ingles v. Tutkaluk Construction Ltd., [2000] SCC 12 (CanLII),at paragraph 59.  
Campbell v. Calgary Power Ltd., [1988] A.J. No. 855 (Alta. C.A.), at 9  
R.S.A. 1980, c. C-23  
Housen v. Nikolaisen [1997] S.J. No. 759, at para. 108, reversed on appeal, restored by the Supreme  
Court of Canada, Housen v. Nikolaisen, [2002] 2 S.C.R. 235, AZ-50118043, J.E. 2002-617  
500-05-001686-946  
PAGE: 721  
Th e dam ages issu e  
Plaintiff’s claim  
[
3539] Widdrington’s claim for damages totalling $2,672,960 breaks down as follows3806  
:
•
•
$1,422,960 representing the full refund of his total investments in Castor;  
$1,250,000 representing the costs for the settlement out of court of the  
petition and legal action pursuant to a transaction agreement entered into  
on March 11, 1998, between Widdrington and the Trustee to Castor’s  
bankruptcy.  
[
3540] The amount of $1,422,960 claimed by Widdrington for his investments in Castor  
are the result of three successive transactions that Widdrington made between October  
988 and October 1991:  
1
•
A deposit of $200,000 in October 1988, which amounted to $231,800.82  
when it was rolled over to finance his first investment;  
•
An additional $898,599.18, paid in December 1989 in order to complete  
the financing of the first investment - the purchase of four (4) units in  
Castor for an aggregate price of $1,130,400;  
•
The purchase of an additional unit in the amount of $292,560, in October  
1991.  
Positions in a nutshell  
Plaintiff  
[
3541] Plaintiff argues that he should be granted all the damages claimed, namely  
because:  
•
He would never have been involved with Castor, and would never  
have been in the position to approve dividends, but for his reliance on  
the negligently issued audited financial statements.  
3806  
Paragraphs 2 and 171 of the statement of claim  
500-05-001686-946  
PAGE: 722  
•
Had the audited financial statements and valuation letters revealed the  
true financial situation of Castor, he would not have invested and  
therefore would not have suffered the loss of the invested amounts.  
•
The amounts he paid to the Trustee to settle the claims are the direct  
and immediate consequence of Defendants’ fault. He trusted that the  
audited financial statements fairly presented Castor’s true financial  
position, and he was confident that Castor was in a position to pay the  
$
15,522,942 in dividends declared in the 12 months preceding its  
bankruptcy, when, unbeknownst to him, Castor was hopelessly  
insolvent.  
•
His damages should not be reduced by any supposed benefits he  
obtained as a result of his investment in Castor.  
o Director fees, which are compensation for work, and trips to  
Europe for board meetings, cannot be characterized as “profits”.  
o The dividends and interest earned on the investments cannot  
be characterized as profits. Had Widdrington not invested in  
Castor, he could have invested in another venture.  
o It would be unfair to allow Defendants to obtain a reduction for  
such gains because Plaintiff lost his entire investment due to  
Defendants’ negligence, and was deprived of the earnings  
benefit of his investment. But for Defendants’ negligence, his  
investment should have continued to generate revenue but, due  
to the fact that it has been lost completely, is no longer  
generating revenue.  
[
3542] As far as the reimbursement of the settlement that he reached with the Trustee,  
Plaintiff further argues the following:  
•
•
Defendants benefited from this settlement, as Plaintiff’s claim under this  
head of damages would have been for the entire amount of any judgment  
against him had he not settled.  
Even though his approval of the dividends was based on the audited  
financial statements, and therefore the fault of Defendants, it was far from  
certain at the time that a contestation would be successful as the  
Bankruptcy and Insolvency Act did not explicitly provide a defence based  
3
807  
on the reasonable belief of the company’s ability to pay.  
3807  
Castor Holdings (Syndic de), [2008] QCCS 3437 (CanLII) at 57-67.  
500-05-001686-946  
PAGE: 723  
•
If the claim against him had been successful, Plaintiff feared that he would  
have been required to satisfy the entire judgment, as he was one of three  
Canadian defendants (the others are Europeans) and the only one with  
assets in Canada.  
•
The fact that in 2008 the other directors were found solidarily liable to  
repay the dividends after an arduous and expensive litigation further  
3
808  
supports the reasonableness of the settlement.  
[
3543] Plaintiff submits that the following issues, also raised by the Defendants, are  
irrelevant in light of the facts of the case, and ill-founded.  
•
The “stampede effect”:  
o had the audited financial statements and valuation letters revealed the  
true financial situation of Castor, Widdrington would not have invested  
and therefore would not have suffered a loss, even if there had been a  
3809  
stampede effect” in 1988 , or  
“
o if the audited financial statements and the share valuation letters  
prepared by C&L (PW-5 and PW-6) had reflected, for real, the financial  
position of Castor, Castor would have been a highly solvent and viable  
company, able to survive a downturn in the economy, as it had  
apparently done in the early 80s.  
•
•
The “stampede effect”: No proof was made by Defendants to support their  
assertion that there would have been a stampede effect.  
The shareholders’ agreement: Had the audited financial statements not been  
misstated, and had C&L’s opinion as the fair market value of Castor’s shares  
been correct, there are no provisions in the Shareholders’ Agreement that  
would have precluded Widdrington from disposing of his shares in Castor,  
pursuant to its terms.  
•
•
The “tax treatment”: Defendants should not be able to benefit from the  
potential savings generated from losses which are borne by the Crown by  
way of tax savings. If the Court was to come to a different conclusion,  
Defendants who had the burden of proof did not discharge it.  
The “alleged faults of others”: Liability of the Defendants cannot be reduced in  
any way due to unproven allegations they made against third parties that are  
3
808  
809  
Castor Holdings (Syndic de), [2008] QCCS 3437 (CanLII), at para 1-2 and 146.  
Hodgkinson v. Simms [1994] 3 S.C.R. 377 (SCC), at para. 72 and 92.  
3
500-05-001686-946  
PAGE: 724  
not parties to the litigation. Defendants were free to commence a separate  
action against anyone who they felt might also be responsible, and claim  
indemnification from them accordingly. However, this was completely  
irrelevant to the Widdrington action.  
[
3544] Plaintiff argues:  
•
•
•
Widdrington committed no fault, either in the exercise of his duties as director  
of Castor, or in the due diligence he exercised prior to making his respective  
investments in Castor.  
Defendants had the burden to prove a fault on his part, which was the logical,  
direct and immediate cause of the damages suffered. They failed to  
discharge such burden.  
Contributory negligence can only apply when a court finds that two faults  
3
810  
: it cannot be the case in the present file.  
have caused the damage  
[
3545] Plaintiff submits there is no issue of contributory negligence which could possibly  
impact on his capacity to recover, whether the applicable law is the Quebec law or the  
common law applicable in New Brunswick or Ontario. Plaintiff cites the provisions of the  
New Brunswick law, the provisions of the Ontario law and he argues that the principles  
established by Quebec doctrine and jurisprudence are similar.  
3811  
The relevant provisions of the New Brunswick Contributory Negligence Act.  
•
1
(1) Where by the fault of two or more persons damage or loss is caused  
to one or more of them, the liability to make good the damage or loss is in  
proportion to the degree in which each person was at fault but if, having  
regard to all the circumstances of the case, it is not possible to establish  
different degrees of fault, the liability shall be apportioned equally. […]  
2
(2) Except as provided in sections 3 and 4, where two or more persons  
are found at fault they are jointly and severally liable to the person  
suffering the damage or loss, but as between themselves, in the absence  
of any contract express or implied, they are liable to make contributions  
to and indemnify each other in the degree in which they are respectively  
found to have been at fault. 3  
812  
3
810  
See, for example Business Development Bank of Canada c. Pfeiffer, [2009] QCCS 2310  
CanLII), at para. 93.  
(
3
811  
.S.N.B. 1973, c. C-19, articles 1(1) and 2(2)  
3
812  
D-666; Subsequent amendments to this Act up to this day are as follows: 1991, c.27, s.11: «  
Subsection 2(2) of the Contributory Negligence Act, chapter C-19 of the Revised Statutes, 1973, is  
amended by striking out "sections 3 and 4" and substituting "section 4". »; 1995, c.40, s.3(1) : «  
Subsection 2(2) of the Contributory Negligence Act, chapter C-19 of the Revised Statutes, 1973, is  
500-05-001686-946  
PAGE: 725  
•
The relevant provisions of the Ontario Negligence Act.3813  
1
. Where damages have been caused or contributed to by the fault or  
neglect of two or more persons, the court shall determine the degree in  
which each of such persons is at fault or negligent, and, where two or  
more persons are found at fault or negligent, they are jointly and severally  
liable to the person suffering loss or damage for such fault or negligence,  
but as between themselves, in the absence of any contract express or  
implied, each is liable to make contribution and indemnify each other in  
the degree in which they are respectively found to be at fault or negligent.  
3
. In any action for damages that is founded upon the fault or negligence  
of the defendant if fault or negligence is found on the part of the plaintiff  
that contributed to the damages, the court shall apportion the damages in  
proportion to the degree of fault or negligence found against the parties  
3814  
respectively.  
[
3546] Plaintiff argues the Defendants should be held jointly and severally liable. In his  
written submissions of July 8, 2010, Plaintiff argued and wrote:  
Liability between the partners of C&L is joint and several because, according to  
art. 1106 Civil Code of Lower Canada (C.c.), this is the rule for extra-contractual  
liability between two or more persons. Several cases have held that the  
professional liability of partners working together in auditing firms results in  
3
815  
liability on a joint and several basis, including Verrier c. Malka.  
Art. 1854 C.c.,  
which provides that partners are not jointly and severally liable for the debts of  
the partnership, does not interfere with the application of 1106 C.c. in this action.  
This is because the provision leads to joint liability for the partnership’s  
3816  
contractual obligations only.  
rather, governed by the rules of mandate,  
of the partners) are liable for the damages caused by the fault of their  
A partnership’s professional responsibility is,  
3817  
according to which mandators (all  
3818  
mandataries (the individual partners) based on 1054 C.c.  
106 C.c. applies to result in joint and several liability.  
Accordingly, article  
1
amended by striking out "Except-as provided in section 4, where two or more persons" and  
substituting "Where two or more persons". s. 3(2): « Section 4 of the Act is repealed.»  
R.S.O. 1990, c. N.1, articles 1 and 3  
3
813  
814  
3
R.S.O. 1980, c. 315, s. 4.  
3
815  
AZ-50401934 (S.C.), aff’d, 1998 CanLII 12884 (Qc. C.A). See also Sumabus inc. c. Daoust, [1994]  
J.Q. no. 2667 at para. 42.  
3816  
Discussing article 2219 C.C.Q. (which replaced article 1854 C.c.), the Court explained in Bélisle-  
Heurtel c. Tardif, REJB 2000-20086 at para. 182 that joint liability «ne s'applique qu'en matière  
contractuelle».  
3
817  
According to article 1856 C.c., liabilities which are not regulated by any article under the title Of  
Partnerships, are governed by the rules Of Mandate. Since professional liability is not so covered, these  
rules apply.  
3
818  
Article 1731 C.c.  
500-05-001686-946  
PAGE: 726  
In 1925, the Supreme Court of Canada applied article 1854 C.c. to prevent a  
plaintiff from recovering the totality of a debt resulting from one partner’s failure to  
3819  
pay the plaintiff’s debt pursuant to a mandate.  
This decision, however, should  
not prevent this Court from holding Defendants jointly and severally liable in the  
present case. Firstly, the case is distinguishable on account of the fact that the  
plaintiff’s action was based on a failure to pay pursuant to a specific mandate,  
which could be considered a debt of the partnership for which art. 1854 C.c.  
applied. Conversely, there is no contract on which to base this argument in the  
Widdrington action. Rather, Plaintiff’s claim is exclusively based on an extra-  
contractual fault for which solidarity amongst all responsible parties is presumed  
by law. Defendants derived credibility from using C&L’s name in carrying out their  
professional practice together; third parties relying on the strength of that name  
are therefore entitled to claim from any of them for the losses incurred as a result  
of their reliance. Secondly, civilian scholars have taken the position that this  
case was wrongly decided because even though there was a contract, the claim  
3
820  
related to a breach of a professional obligation.  
Indeed, subsequent cases  
have presumed, without any discussion on the issue, that the professional fault of  
3821  
a partner results in joint and several liability between all partners.  
This  
approach is also consistent with that followed in the rest of Canada, where  
partners are joint and severally liable for extra-contractual faults committed by  
their partners in the normal course of business of a partnership by virtue of  
3822  
various Partnership Acts. For example, in Ontario’s Partnership Act , section  
1
1 stipulates that that the partnership is liable, to the same extent as the partner  
committing the fault, for losses resulting from “any wrongful act or omission of a  
partner acting in the ordinary course of the business of the firm, or with the  
authority of the co-partners.” While section 13 thereof stipulates that partners are  
jointly liable for the obligations contracted by the partnership (as in Quebec), it  
also stipulates (as do the Quebec rules of mandate and extra-contractual  
liability), that they are severally liable for the obligations of the partnership  
incurred under section 11.  
[
3547] Plaintiff concludes that the Defendants shall be condemned to pay, jointly and  
severally, the amount claimed.  
Defendants  
[
3548] For one or many of the following reasons, the Defendants submit that no  
damages can be or should be awarded to Plaintiff.  
3
819  
Perodeau c. Hamill, [1925] S.C.R. 289.  
3820  
Hervé Roch and Rodolphe Paré, Traité de Droit Civil du Québec (Montréal: Wilson Lafleur, 1942) at  
4
02.  
3821  
See e.g. Laidley c. Kovalik, 1994 CanLII 5878 at 2 (Qc. C.A.); Verrier c. Malka, AZ-50401934 (S.C.),  
aff’d, 1998 CanLII 12884 (Qc. C.A) and Sumabus inc. c. Daoust, [1994] J.Q. no. 2667 at para. 42.  
3
822  
R.S.O. 1990, c. P.5, section 11.  
500-05-001686-946  
PAGE: 727  
Claim of $1,422,960  
[
3549] Defendants submit that Widdrington’s claim of $1,422,960 should be dismissed  
for the following additional reasons:  
•
1
None of those 3 investments of October 1988, December 1989 and October  
991 can be attributed to Widdrington’s reliance upon the auditor’s reports on the  
financial statements of Castor, the valuation letters signed by C&L or the Legal  
for Life Certificates issued to McCarthy Tétrault with respect to its Legal for Life  
Opinions. The overwhelming evidence clearly shows that the determinative factor  
that led to Widdrington’s three investments was his absolute faith and blind trust  
in Stolzenberg.  
•
The main and immediate cause of the creditors’ losses was the collapse of  
Castor in 1992 due to the meltdown of the commercial real estate values  
commencing in the early 90s.  
3
823  
,
•
Given the terms and conditions of Castor’s shareholders’ agreement  
Widdrington knew or should have known that there was no free market for  
Castor’s shares and that he could not dispose of his shares at will without the  
consent of his fellow directors and shareholders. If it was difficult for Widdrington  
to get out of his investments in the best of circumstances, it would be even more  
so if Castor’s financial condition deteriorated. The lack of exit ability was a risk  
that Widdrington knew and accepted from the outset.  
•
Widdrington has not discharged his burden to prove that if the audited  
consolidated financial statements for the relevant year-ends had been issued  
with hundreds of millions in losses he alleges they should have shown, he would  
have been able to recover part or all of his 1989 and 1991 investments. In fact,  
had the audited consolidated financial statements been issued and published  
with the figures proposed by Widdrington, the most probable outcome would  
have been a run on all Castor’s assets (the stampede effect) by all the secured  
and unsecured creditors, which would have left the company bankrupt with  
hundreds of millions of debt outstanding, debt to which Widdrington’s  
investments were subordinated.  
•
Finally, the “benefit rule” should apply and the amounts received by  
Widdrington while he was a shareholder and a director of Castor should be  
deducted from any indemnity. Therefore, benefits aggregating $179,436.10  
should be deducted from any damages the Court would allow to Widdrington  
(
further to his investments in Castor) because it would be highly irregular and  
unfair if Widdrington was allowed to get the full refund of his investments while  
keeping the benefits thereof at the same time.  
3823  
PW-2832  
500-05-001686-946  
PAGE: 728  
Claim of $1,250,000  
[
3550] Defendants submit that Widdrington’s claim of $1,250,000 representing the  
refund of what Widdrington paid to the Trustee to settle out of Court the latter’s petition,  
3
824  
seeking reimbursement of the September 1991 dividends  
and the action for  
825  
should be dismissed for the  
3
negligence instituted against Castor’s directors,  
following additional reasons:  
•
Widdrington’s claim for the refund of the amounts he agreed to pay to the  
3826  
has nothing to do with his  
Trustee pursuant to the settlement agreement  
alleged reliance on C&L’s representations for purposes of his investments in  
Castor. His personal reasons for justifying this settlement have nothing to do with  
C&L’s alleged negligence in the representations they issued with respect to  
Castor.  
•
These legal proceedings were instituted against Widdrington essentially by  
reason of Widdrington’s failure to properly discharge his duties and  
responsibilities as a director of Castor.  
o Either Widdrington had a due diligence defence available of good faith  
reliance on C&L and, if that defence was well-founded, his payment to the  
Trustee was gratuitous and he cannot be indemnified; or,  
o The due diligence defence was not well-founded, and then Widdrington  
has only himself to blame;  
o In either circumstance, there is no basis for a claim against C&L.  
•
Widdrington failed to discharge his legal duties as a director. His failure, as well as  
the failure of the other directors to discharge their duties, allowed Stolzenberg to  
manage Castor without board supervision. This failure precludes Widdrington from  
claiming that he relied in a reasonable manner on C&L with respect to financial  
information for which Castor’s directors were primarily responsible.  
•
Widdrington failed to adduce proof justifying the reasonableness of the amount of  
the settlement reached with the Trustee.  
3824  
3825  
3826  
PW-1  
PW-8A  
PW-39  
500-05-001686-946  
PAGE: 729  
The existence of a claim by the Trustee in bankruptcy  
•
The Trustee in bankruptcy of Castor instituted an action against C&L, on behalf of  
3827  
Castor, claiming $40 million of damages . The Trustee’s action precedes and pre-  
empts those of ordinary creditors. If the Trustee’s action was successful, Widdrington  
would receive an amount that cannot be ascertained at present. Therefore, and since  
Widdrington’s damages cannot be definitively determined before the Trustee’s action is  
decided, Widdrington’s claim should be dismissed.  
No joint and several liability for the C&L partners  
[
3551] In their written submissions of July 8, 2010, Defendants write and argue:  
If the Court determines that C&L is liable to the Plaintiff, the issue of the liability  
of C&L individual partners would arise. C&L is an Ontario partnership. However,  
since there are no allegations with respect to the rules governing the liability of  
individual partners as per Ontario law, the Court must apply Quebec law (art.  
2
809(2) C.C.Q).  
The liability of partners for the acts performed before January 1st, 1994 is  
3828  
governed by the CCLC . Under the CCLC, a partnership of professionals was  
a civil partnership since the activity of professionals was not considered to be of  
3829  
a commercial nature . According to art. 1854 CCLC, the partners of a civil  
partnership are not solidarily liable for the debts of the partnership, they are  
rather liable to the creditor in equal share, even though their shares in the  
partnership may be unequal. In the case of Pérodeau v. Hamill (1925) S.C.R.  
2
89, it was thus decided by the Supreme Court that the liability of partners of a  
civil partnership was conjointe and not solidarily. As a consequence, the  
individual partners of C&L would only be liable conjointement, each for an equal  
amount, for any liability that could be found against C&L in the present case.  
[3552] In their written submissions of August 5, 2010, Defendants add:  
Plaintiffs have never alleged the application of the Ontario Partnership Act to  
govern the issue of the liability of C&L’s individual partners, if any. In light of this,  
Quebec law applies in that respect, not because Quebec law is applicable as  
such, but because no party has alleged the application of another law (cf. art.  
2
809 CCQ). The Supreme Court decision in Pérodeau v. Hamill (cf. DPA, p. 263)  
authoritatively determines that the professional liability of the partners of a civil  
partnership is conjointe in equal shares, as per art. 1854 CCLC. Art. 1106 CCLC  
has no application in such a case since it only applies where the defendants  
3827  
3828  
3829  
See file 500-05-003843-933: a pending claim before our Court  
An Act respecting the implementation of the reform of the Civil Code, 1992, Q.L., c.57  
Pérodeau v. Hamill, [1925] S.C.R., 289; Bastien v. Beaulac, J.E. 2000-1963; Samson Bélair, v.  
Autobus Fortin, AZ-87021265  
500-05-001686-946  
PAGE: 730  
have each committed a fault,3 which is certainly not the case when partners of  
830  
a firm are liable qua partners for the wrongful act of the firm or of another partner.  
Evidence  
[3553] Widdrington became a director of Castor in 1990.  
[
3554] Before he made his investment in October 1991, Widdrington participated to  
board of directors’ meetings and shareholder’s meetings:  
•
•
•
The shareholder’s meeting that took place on April 8, 1990, in Zurich.  
The board meeting that took place on October 12, 1990, in Toronto.  
The board meeting of March 21, 1991, in Montreal at which time the  
declaration of dividends was unanimously approved by Castor’s Board of  
Directors.  
•
•
The board meeting and the shareholders’ meeting of May 7, 1991, in Zurich.  
The board meeting of October 24, 1991, in New York City.  
[
3555] A capital call of September 25, 1991 had targeted an amount of $25 million to be  
raised from existing directors and shareholders.  
[
3556] Stolzenberg’s presentation at the board meeting held on October 24, 1991 is  
summed up, as follows, in Castor’s minutes book:  
“
The Chairman reported that as a result of the current environment in the banking  
industry Castor had recently experienced a reduction or cancellation of certain of  
its credit facilities (particularly with the Japanese and French banks) which,  
together with the necessity for the Corporation to refinance certain of its  
mortgage loans (where other financing was not available to borrowers), was  
causing a liquidity problem for Castor, which the Chairman was working hard to  
solve. He stated that certain shareholders were prepared to reinvest their  
dividends to alleviate this problem.  
The directors unanimously endorsed the Chairman’s efforts to correct the  
situation, and the meeting agreed that it was in the best interests of the  
Corporation to raise additional capital and to secure medium term debt financing.  
The Chairman pointed out that the minimum target for raising funds should be  
$
50,000,000 but ideally $100,000,000 to overcome the present situation and to  
look positively forward towards 1992. The Chairman also stated that further  
support of the present shareholders would be absolutely necessary. In that  
3830  
Masoud v. Modern Motor Sales, [1953] S.C.R. 149, at p. 165  
500-05-001686-946  
PAGE: 731  
connection the Chairman reported that he had already secured additional capital  
subscriptions from existing shareholders for $1.5 million”.3  
831  
[
3557] Widdrington described the atmosphere of Castor’s board meeting that took place  
on October 24, 1991, as follows:  
“
Q. How would you describe the atmosphere of that Board meeting?  
A. It was considerably more sombre than previous meetings.  
Q. Sombre in the sense that…  
A. serious.  
Q. Is that because of the – what would you ascribe this somberness to at this  
October twenty-fourth (24th) meeting?  
A. Well, my guess is that it might have been the fact that the directors had been  
asked to put up more money.  
Q. That wasn’t the first time they were asked to do so, was it?  
A. It was as far as I was concerned.  
Q. Did you know at the time whether they had been previously asked to increase  
their shareholding?  
A. I did not.  
Q. Was the somberness also due to the state of the real estate market, in your  
view?  
A. I’m not going to attempt to explain the fact that I felt the meeting was somber,  
outside of my own reaction.  
Q. Was it your reaction that the request for increasing the shareholdings was a  
sign of problems for the company?  
A. It was a sign of some sort of problem in the sense that a system that  
previously existed wasn’t functioning quite as well as it has in the past.3832  
[
3558] As of October 24, 1991, Castor had only secured additional capital subscriptions  
from existing shareholders of $1.5 million.  
3
831  
832  
PW-51  
3
Widdrington, November 9, 1995, pp.164-165  
500-05-001686-946  
PAGE: 732  
[
3559] Castor was very far from its target and Stolzenberg, its Chairman, had proposed  
that $50 to $100 million of capital was required to overcome the situation and to look  
positively at the forthcoming 1992 year.  
[3560] In a memo to Widdrington dated October 26, 1991, Prikopa wrote:  
“
Your investment in Castor is not easy to cash out if for some reason you wanted  
to get out cash out is possible but it is at the discretion of Castor, and if Castor  
got into trouble a sell would not be possible.3  
833  
”
[
3561] Lowenstein testified that, perhaps, as a professional director or a professional  
that does a lot of due diligence, he might have wanted to say, "well, how serious is  
this?”.3  
834  
[
3562] Morrison expressed the opinion that a prudent director should have obtained full  
3835  
.
details on Castor’s problems  
[
3563] Lajoie expressed the opinion that Stolzenberg’s letter dated September 25,  
3
836  
3837  
1
991 , followed by the minutes of the October 24, 1991 board meeting amounted  
to “red flags” that Widdrington should have seriously considered before making his last  
investment.3  
838  
[
3564] When he received the minutes of the October 24, 1991 meeting ( at the meeting  
that took place on December 16, 1991) and noticed that he was the only director who  
had provided funds as a result of the call for additional capital, Widdrington felt  
betrayed.3  
839  
[
3565] As a result of his investments and as a result of his directorship at Castor,  
Widdrington received $164,436.10 in dividends, interest payments and directors’ fees  
3
840  
.
between October 1989 and Castor’s bankruptcy  
3566] In December 1989, Prikopa calculated that the benefits associated with  
[
Widdrington’s investment in Castor included the value of two trips to Europe per year,  
3
841  
estimated at $10,000 . Since Widdrington attended three meetings in Zurich during  
his tenure as director – those of May 8, 1990, May 7, 1991 and February 13, 1992 – he  
would have received an “additional value” of $15,000 on account of these three trips to  
Europe.  
3833  
3834  
3835  
3836  
3837  
3838  
3839  
3840  
3841  
PW-47  
Lowenstein, March 24, 2005  
Morrison, October 4, 2006, p. 200-230  
PW-17  
PW-51  
Lajoie, October 18, 2006, 40-71  
Widdrington, January 6, 2005  
PW-2388  
PW-43-2  
500-05-001686-946 PAGE: 733  
[
3567] No evidence was presented as to the tax treatment of any of the above: the  
$
164,436.10 or the value of trips to Europe.  
[
3568] The legal proceedings instituted against Widdrington were settled out of Court  
3842  
between Widdrington and the  
through a transaction agreement of March 11, 1998  
Trustee. The amounts paid or to be paid by Widdrington, pursuant to this agreement  
3
843  
and the Trustee’s action  
purported to settle both the Trustee’s petition for dividends  
for negligence,3 are:  
844  
•
A first amount of $750,000 paid to the Trustee, which includes an amount of  
150,000 payable to Langlois Gaudreau for their services to bring the  
$
Widdrington action to judgment.  
•
An amount of $650,000 less all legal fees and disbursements incurred to  
execute the judgment, to be paid from the damage award to be granted to  
Widdrington in the present file (court claim).  
[
3569] In May 1998, Widdrington testified that he settled the above-mentioned claims for  
personal reasons such as his age, the need to take care of his daughters and grand-  
3
845  
children.  
At trial, Widdrington also explained that he was concerned with the  
additional exposure that he was facing with respect to the Trustee’s $15 million claim for  
the refund of dividends, as he was one of only three Canadian directors on Castor’s  
board.  
[
3570] On July 30, 2008, a judgment was rendered by Justice Louise Lemelin on the  
Trustee’s petition seeking the reimbursement of the dividends paid to Castor’s  
directors.3 In her judgment, Justice Lemelin namely wrote and concluded:  
846  
[
2] Il est admis que la requérante a conclu des ententes de règlement hors  
cour avec quatre intimés initialement poursuivis, soit avec MM. Luerssen (3 650  
0
00 $), Raborn Jr. (200 000 $), Widdrington (750 000 $) et Dennis (1 250 000 $)  
pour une somme de 5 850 000 $. En début d’audience, la requérante réduit en  
conséquence sa réclamation à 9 672 942 $ contre les autres intimés.  
[
3]  
L’intimé Marco Gambazzi conteste le bien-fondé de cette demande. Les  
quatre autres intimés, Wolfgang Stolzenberg, Wolfgang Leser, Peter Ochsner et  
Walther Stromeyer, n’ont produit aucune contestation et ne sont pas représentés  
lors de l’audience.  
(
…)  
3
3
3
3
842  
843  
844  
845  
PW-39  
PW-1  
PW-8A  
Widdrington, May 22 1998, p.17; Widdrington, December 3, 2004  
3
846  
[
2008] QCCS 3437  
500-05-001686-946  
PAGE: 734  
[
25] Il est utile de réciter des admissions faites par la requérante et l’intimé  
Gambazzi, pour situer le contexte factuel :  
The audited consolidated financial statements of Castor Holdings Ltd. as  
at December 31, 1990 and the Auditor’s report thereon dated February  
1
5, 1991 (collectively filed as Exhibit D-1), both of which were provided to  
the Directors of Castor Holdings Ltd. at or in the days prior to the Meeting  
of Directors held on March 21, 1991, did not indicate:  
a) That Castor Holdings Ltd. was insolvent at that time; and/or,  
b) That the declaration and payment of a dividend by Castor Holdings  
Ltd. in the amount of $15,522,942.00 would render Castor Holdings Ltd.  
insolvent.  
While Respondent Gambazzi reserves his right to make proof and/or  
argue that he did not know of the insolvency of Castor Holdings Ltd. in  
September 1991, Respondent Gambazzi admits that Castor Holdings  
Ltd. was in fact insolvent in September 1991.  
(
…)  
[
43]  
Ce dossier origine de la même faillite, mais ne porte pas sur les mêmes  
questions. Le présent jugement n’a pas à décider de la responsabilité des  
comptables-vérificateurs. D’ailleurs, la requérante et Gambazzi ont signé des  
admissions pour dissiper tout doute et bien circonscrire le cadre du litige. Il est  
utile de les reproduire :  
1
.
Both Petitioner and Respondent contend and believe that  
Coopers & Lybrand (‘’Coopers’’) was at fault in respect of Castor’s  
financial statements, in general, and Castor’s consolidated December 31,  
1
990 financial statements, in particular, as set forth in separate legal  
proceedings initiated by each of Petitioner and Respondent before the  
Quebec Superior Court (the ‘’Coopers Proceedings’’); and  
2
.
Whether Coopers was or was at fault in respect of Castor’s  
financial statements as set forth in paragraph 1 hereof and as alleged by  
each of Petitioner and Respondent in their respective Coopers  
Proceedings, is not an issue and is not to be decided in the Petition.  
(
…)  
[
56]  
Existe-t-il à l’époque pertinente une autre défense pour les intimés? La  
question ne se pose pas pour les intimés Stolzenberg, Leser, Ochsner et  
Stromeyer puisqu’ils n’ont pas contesté la requête ni proposé aucun moyen de  
défense, mais qu’en est-il pour Gambazzi?  
[
57]  
En 1996, la Loi sur la faillite et l’insolvabilité a modifié entre autres  
l’article 101 en introduisant une nouvelle condition pour engager la responsabilité  
500-05-001686-946  
PAGE: 735  
des administrateurs s’ils « n’avaient pas de motifs raisonnables de croire que la  
transaction était faite à un moment où [la compagnie] n’était pas insolvable ou ne  
la rendrait pas insolvable. »  
(
…)  
[
60]  
Les auteurs opinent que l’amendement qui nous intéresse est de droit  
nouveau. Me Dolan souligne qu’avant un seul moyen disculpatoire était possible  
pour les administrateurs (art. 101(3)). Il ajoute :  
Until recently, the BIA, unlike most comparable corporate legislation  
dealing with the declaration of dividends […] did not contain a “due  
diligence” defence for believing that the corporation was not insolvent at  
the time in question.  
[
61]  
L’auteur Bennett y voit aussi une limitation de responsabilité des  
administrateurs, disposition législative nouvelle qu’il qualifie ainsi :  
To mitigate the potential liability of directors, Parliament amended section  
1
01 of the Act to provide that the directors are not liable if they have  
reasonable grounds to believe that the transactions was occurring at the  
time the Corporation was solvent. In addition to the defence that the  
directors protested, the directors can argue that they exercised due  
diligence, acted in good faith […].  
[
62] Selon les auteurs Martel , la modification de l’article 101 est venue  
corriger une injustice pour les administrateurs qui ne pouvaient bénéficier de la  
défense d’une croyance raisonnablement fondée sur des états financiers ou des  
rapports d’experts comme en matière corporative. Si on exclut la protestation, en  
fait les administrateurs avaient l’obligation de faire la preuve du fait objectif de la  
solvabilité de la compagnie.  
[
63]  
Les interprétations de la doctrine confirment également l’argument de  
texte qui manifestement accrédite l’ajout d’une condition pour tenir responsables  
les administrateurs lorsque le dividende est payé alors que la compagnie est  
insolvable et ouvre en contrepartie un nouveau moyen de défense à  
l’administrateur.  
[
64]  
Le tribunal note de plus que le législateur dans ses mesures transitoires  
prévoit que les modifications à l’article 101 « s’appliquent aux faillites et aux  
procédures visées par des procédures intentées après l’entrée en vigueur de  
1
997 ».  
[
65]  
En bref, les administrateurs de Castor au moment de la faillite pouvaient  
se disculper en prouvant leur protestation au paiement ou qu’au 31 septembre  
991, Castor était solvable, il n’existait alors aucune autre défense disponible.  
1
(
…)  
500-05-001686-946  
PAGE: 736  
[
71]  
Le tribunal conclut que même si la défense de croyance raisonnable  
n’existait pas lorsque le dividende a été payé en 1991, il peut exercer  
judiciairement sa discrétion et ne pas rendre jugement en défaveur de M.  
Gambazzi. Ce dernier a le fardeau d’arguer pour quels motifs et d’en faire la  
preuve. Il faut ici distinguer. Le tribunal ne statue pas sur le moyen de défense  
accordé par le nouvel article 101, mais apprécie s’il doit exercer sa discrétion en  
se guidant des principes d’équité.  
(
…)  
[
87]  
M. Gambazzi est un juriste de formation, un homme familier avec le  
monde des affaires, qui a de plus l’expérience des conseils d’administration et  
des véhicules corporatifs. Sa signature complaisante témoigne d’imprudence et  
d’un manque de diligence qui doivent aussi être pris en compte.  
[
88]  
Cette participation de Gambazzi à diverses transactions nous amène à  
vérifier s’il peut avec succès soutenir que ses décisions étaient tributaires des  
états financiers et opinions accessibles lors de l’assemblée du 21 mars. Le  
tribunal ne croit pas que M. Gambazzi était dans la complète ignorance de la  
situation financière de Castor, un survol de certaines transactions éclaire.  
[
94]  
Ce qui est pertinent dans le cadre de notre discussion, ce n’est pas  
d’identifier les dettes et obligations réelles de Castor mais d’apprécier si la  
conduite de M. Gambazzi lui permet de bénéficier de la discrétion accordée par  
l’article 101(2).  
(
…)  
[
98]  
M. Gambazzi n’a pas informé Coopers & Lybrand ou le Conseil  
d’administration de ces prêts consentis à des compagnies dont il est  
administrateur. L’intimé ne peut toujours pas, lors de son témoignage en Cour,  
confirmer l’identité des véritables propriétaires de ces compagnies et, ce qui est  
plus important, de leur situation financière respective. Il ne sait pas non plus si  
les intérêts prévus ont été payés. Le syndic, pour sa part, dit que les créances à  
l’endroit de ces compagnies n’ont pu être exécutées.  
[
99]  
Le tribunal n’a pas à se prononcer sur le rôle qu’auraient pu jouer les  
vérificateurs Coopers & Lybrand; comme nous l’avons vu, leur responsabilité est  
recherchée entre autres par la requérante et l’intimé Gambazzi dans d’autres  
dossiers de Cour. L’étude de ces prêts n’est faite que pour illustrer que l’intimé  
savait que certaines entrées comptables n’étaient pas rigoureusement exactes et  
pouvaient avantager la présentation de la situation de Castor, comme ce fut le  
cas pour les transactions de FITAM.  
(
…)  
[
104] Le tribunal retient que l’intimé Gambazzi était informé que, de façon  
générale, Castor et/ou M. Stolzenberg se livrait à un exercice de « window  
dressing » que l’intimé définit en ces termes : (…)  
500-05-001686-946  
PAGE: 737  
(
…)  
[
106] La preuve retrace une participation de M. Gambazzi dans le flot de  
transactions circulaires entourant l’émission de 100 millions d’obligations par  
Castor. Les états financiers constatent en 1989 et 1990 ce passif à long terme.  
La note 6 des états financiers explique qu’il s’agit de deux groupes d’obligations  
de 50 millions, échéant respectivement les 30 juin 1997 et 2002 avec possibilité  
pour Castor de rembourser à compter de 1992 et 1994.  
(
…)  
POUR TOUS CES MOTIFS, LE TRIBUNAL :  
[
[
145] ACCUEILLE la réclamation de la requérante;  
146] CONDAMNE solidairement les intimés à payer à la requérante la somme  
de 8 759 490,00 $ avec intérêts à compter de la signification et l’indemnité  
additionnelle à compter du 1er juin 2001.  
[
147] LE TOUT, avec dépens contre les intimés.  
Conclusions  
General conclusions  
[
3571] The Court assesses the quantum of Widdrington’s claim at the amount claimed  
of $ 2,672,960 for the following reasons.  
[
3572] Had the audited financial statements and the valuation letters revealed the true  
financial situation of Castor, Widdrington would not have invested in Castor. Therefore,  
he would not have suffered the loss.  
[
3573] The amount of $2,672,960 constitutes a damage which is the direct and  
immediate consequence of the Defendants’ conduct.  
[
3574] Plaintiff committed no fault, either in the exercise of his duties as a director of  
Castor, or in the due diligence exercised by him prior to making his respective  
investments in Castor.  
[
3575] There was no contributory negligence on the part of Widdrington. As my  
colleague Justice Lowry said in Kripps v. Touche Ross and Co., after the case had  
come back before the British Columbia Supreme Court to resolve the issues of  
contributory negligence and quantum of damages:  
[
18] The mere assumption of the risk does not, as the investors contend,  
amount to negligence. (…) It may have been an unacceptable risk for the  
500-05-001686-946  
PAGE: 738  
conservative investor but, in my view, it was not, as presented, an unreasonable  
risk for a prudent investor seeking a high rate of return.  
[
19] That being so, the auditors' plea of contributory negligence cannot  
3847  
(our emphasis)  
succeed.  
[
3576] Moreover, in the circumstances of the present case, the Court finds it appropriate  
to apply the following remarks made by the Supreme Court of Canada in the case of  
Hodgkinson v. Simms:  
[
76] What is more, the submission runs up against the long-standing equitable  
principle that where the plaintiff has made out a case of non-disclosure and  
the loss occasioned thereby is established, the onus is on the defendant to  
prove that the innocent victim would have suffered the same loss regardless of  
the breach; (…)  
[
92] From a policy perspective it is simply unjust to place the risk of market  
fluctuations on a plaintiff who would not have entered into a given transaction  
but for the defendant's wrongful conduct.3 (our emphasis)  
848  
Specific conclusions  
Claim of $1,422,960  
[
3577] The Plaintiff has discharged his burden of proof: Plaintiff has established fault,  
damages and causality.  
[
3578] There is no reason to deduct the amounts received by Widdrington while he was  
a shareholder and a director of Castor.  
o The director fees and travel expenses allocation that Widdrington received  
were paid as compensation for work and assumed responsibilities.  
o If Widdrington had not invested in Castor, he would have invested in  
another vehicle. Evidence shows that his return would have been equal,  
and may be even superior to the dividends he received on his Castor’s  
investments on a short term basis.  
[
3579] The tax treatment of Plaintiff’s loss has no relevance to the Court’s determination  
of the quantum of his damages.  
3
847  
848  
[
1998] B.C.J. No. 1670, [1999] 3 W.W.R. 629, 56 B.C.L.R. (3d) 160, 41 B.L.R. (2d) 124,80 A.C.W.S.  
3d) 1272  
Hodgkinson v. Simms [1994] 3 S.C.R. 377 (SCC), at para. 72 and 92.  
(
3
500-05-001686-946  
PAGE: 739  
3849  
3580] In Girard & Cie c. Allaire , Justice Forget of the Québec Court of Appeal  
[
explained that defendants should not be able to benefit from the potential savings  
generated from losses which are borne by the Crown by way of tax savings:  
Il faut donc comprendre que les commanditaires, selon l'expert, auraient pu  
déduire les pertes annuelles entre 1985 et 1989. Même si tel était le cas,  
j'estime que l'appelante ne pourrait invoquer cette exemption fiscale à son profit.  
J'illustre mon raisonnement par un exemple simple. Si le vendeur d'un immeuble  
garantit les revenus de loyer et que les revenus n'atteignent pas le montant  
garanti, l'acheteur pourra certes demander une diminution du prix de vente - ou  
des dommages - sans que le vendeur puisse le contraindre à déduire les  
exemptions fiscales obtenues à la suite d'une exploitation déficitaire. Autrement,  
comme le note avec justesse le juge Barbe, on ferait supporter par l'État une  
partie des dommages causés à l'acheteur par la faute du vendeur.  
[
3581] In any event, if alleged tax benefits could be taken into account, absent of  
appropriate evidence into the court record, the argument must be dismissed. In Girard &  
Cie c. Allaire, the Court of Appeal further found that if it would require speculation, it  
could not be determined on the balance of probabilities as required and should be  
dismissed.  
[3582] The shareholder’s agreement argument is either irrelevant or ill-founded:  
•
Irrelevant: the Castor shareholders’ agreement provisions would have been  
irrelevant if Widdrington had not invested in Castor.  
•
Ill-founded: had the audited financial statements not been misstated, and had  
C&L’s opinion as the fair market value of Castor’s shares been correct, there are  
no provisions in this shareholders’ agreement that would have precluded  
Widdrington from disposing of his shares in Castor, pursuant to its terms.  
Claim of $1,250,000  
[
3583] Widdrington would never have been involved with Castor, and would never have  
been in the position to approve the dividends, but for his reliance on the negligently  
issued audited financial statements, valuation letters and Certificates for Legal-for-Life  
Opinions.  
[
3584] Widdrington trusted that the audited financial statements fairly presented  
Castor’s true financial position, and he reasonably relied on them being confident that  
Castor was in a position to pay dividends when, unbeknownst to him, Castor was  
hopelessly insolvent.  
3849  
1998 CanLII 12757 (QC C.A.)  
500-05-001686-946  
PAGE: 740  
[
3585] While it might not have been the case for other directors of Castor who had a  
different and more extensive knowledge of Castor’s affairs, the Court finds that  
Widdrington did discharge his duties as a director of Castor: Widdrington acted with  
care and due diligence in the circumstances.  
[
3586] However, and as Justice Louise Lemelin wrote and explained in her judgment  
rendered on July 30, 2008, the Bankruptcy and Insolvency Act at the time (1990-1991)  
did not provide a defence based on the reasonable belief of the company’s ability to pay  
even though a director’s approval of dividends was based on audited financial  
statements.  
[
3587] Facing a claim of more than $15 million and knowing he might be the only  
Canadian defendant having assets in Canada, Widdrington chose to finalize a  
settlement with the Trustee.  
[
3588] Defendants had the burden to prove that the settlement was unreasonable in  
order to disprove it as a head of damages. They failed to discharge that burden. As a  
matter of fact, the Court concludes that the settlement that intervenes was more than  
reasonable, in all circumstances.  
[
3589] Rather than risking the accumulation of his losses, Plaintiff reasonably decided to  
3850  
settle with the Trustee.  
[
3590] Whether Widdrington could have raised a valid defence is not relevant. It was  
Defendants’ obligation to make proof that the settlement was unreasonable in order to  
disprove it as a head of damages. As Justice Gomery explained when he rejected a  
defendants’ contestation to a plaintiff’s payment of a tax reassessment on account of  
their negligence:  
Defendants argue that if he had contested the reassessment, he would  
eventually have succeeded in having it overturned. No expert opinion to that  
effect has been produced, the tax decision cited by Defendants refers to a  
different development, and no evaluation of the legal cost of lengthy litigation  
before the relevant tribunals has been made. In all of the circumstances the  
Court is not satisfied that Plaintiff was in error in accepting to pay the  
3851  
reassessment.  
3
850  
See 1479 CCQ.; McGregor On Damage, 16th ed. (London: Sweet & Maxwell, 1997) at 285-  
87, Gallop v. Abdoulah, (2008) SKCA 29 (CanLII), at 36; Malpass v. Morrison, [2004] O.J. No.  
596, aff’d by the Court of Appeal, Malpass v. Morrison, [2006] O.J. No. 719.  
2
4
3
851  
Laidley c. Kovalik [1992] R.R.A. 501, at 46 (C.S.), aff’d by the Court of Appeal Laidley c.  
Kovalik, 1994 CanLii 5878 (QC.C.A).  
500-05-001686-946  
PAGE: 741  
The Trustee’s law suit  
[
3591] When Justice Carrière decided on February 20, 1998 to select the Widdrington  
case to proceed to trial, while the other Castor-related actions were suspended, he was  
fully aware of the action instituted by the Trustee. As a matter of fact, this action is one  
of the active files that appears on Annex A of the trial minutes of March 12, 2008 and to  
which the present judgment applies on all common issues.  
[3592] That decision was not appealed and the issue is now res judicata.  
[
3593] As stated in Bélanger c. Masson :  
Il serait illogique que le juge siégeant dans l'affaire civile puisse déclarer  
irrecevable un recours dont la poursuite a été spécifiquement autorisée par un  
autre juge de la même Cour dans l'affaire de la faillite impliquant la  
défenderesse. Ainsi, dans l'hypothèse où il y aurait effectivement une forme  
de litispendance, elle est autorisée spécifiquement par le jugement du juge  
Verrier, jugement non porté en appel.3 (our emphasis)  
852  
[
3594] Defendants cannot, 13 years later, successfully allege, as they do, that “The  
Trustee’s action precedes and pre-empts those of ordinary creditors. If the Trustee’s  
action was successful, Widdrington would receive an amount that cannot be  
ascertained at present. Therefore, and since Widdrington’s damages cannot be  
definitively determined before the Trustee’s action is decided, Widdrington’s claim  
should be dismissed.”  
[
3595] The Trustee’s claim falls under a different heading of damages than that of  
Plaintiff.  
[
3596] In any case, if the Trustee’s claim was to encompass the Widdrington’s claim, in  
whole or in part, Defendants would be allowed to argue the issue before the judge  
hearing and deciding the Trustee’s claim and have it resolved.  
Joint and several liability  
[
3597] There were no allegations with respect to the rules governing the liability of  
individual partners as per Ontario law. As per article 2809 of the Civil Code of Quebec,  
the Court must apply Quebec law.  
[
3598] Articles 1854 and 1856 of the Civil Code of Lower Canada read as follows:  
1
854. Partners are not jointly and severally liable for the debts of the  
partnership. They are liable to the creditor in equal shares, although their shares  
in the partnership may be unequal.  
3852  
[2007] QCCS 850 at para. 12, EYB 2007-115788 (S.C.).  
500-05-001686-946  
PAGE: 742  
This article does not apply in commercial partnerships.  
1
856. The liabilities of partners for the acts of each other are subject to the  
rules contained in the title Of Mandate, when not regulated by any article in this  
title.  
[
3599] Articles 1054, 1106 and 1731 of the Civil Code of Lower Canada, relevant to the  
issue, read as follows:  
1
054. He is responsible not only for the damage caused by his own fault, but  
also for that caused by the fault of persons under his control and by things under  
his care; (…)  
The responsibility attaches in the above cases only when the person subject to it  
fails to establish that he was unable to prevent the act which has caused the  
damage.  
Masters and employers are responsible for the damage caused by their servants  
and workmen in the performance of the work for which they are employed.  
1
106. The obligation arising from the common offence or quasi-offence of two or  
more persons is joint and several.  
1
731. He (the mandatory) is liable for damages caused by the fault of the  
mandatary, according to the rules declared in article 1054.  
[
3600] Article 1854 of the Code applies to the partnership’s contractual obligations  
3
853  
only.  
[
3601] Defendants’ liability towards Plaintiff is extra contractual. No specific article in the  
title eleventh of the Code “Of Partnership” regulates partnership’s extra contractual  
liability. Therefore, according to article 1856 of the Code, partnership’s professional  
responsibility towards third parties is governed by the rules of mandate.  
[
3602] Mandators (all of the partners) are liable for the damages caused by the fault of  
their mandataries (the individual partners) and of their employees (all the persons who  
worked on the audits) based on article1054 C.c.  
[
3603] Article 1106 C.c. applies: the Defendants are jointly and severally liable towards  
3854  
Plaintiff.  
3
853  
854  
Bélisle-Heurtel c. Tardif, REJB 2000-20086 at para. 182  
3
Laidley c. Kovalik, 1994 CanLII 5878 at 2 (Qc. C.A.); Verrier c. Malka, AZ-50401934 (S.C.), aff’d,  
1
998 CanLII 12884 (Qc. C.A) and Sumabus inc. c. Daoust, [1994] J.Q. no. 2667 at para. 42.; Martel  
c. Hôtel-Dieu St-Vallier, [1969] R.C.S. 745; Hervé Roch and Rodolphe Paré, Traité de Droit Civil du  
Québec (Montréal: Wilson Lafleur, 1942) at 402.  
500-05-001686-946  
PAGE: 743  
Cost s  
3855  
3604] According to article 466 of the Code of Civil Procedure , the Court must rule, in  
[
its discretion, on the costs of both the first and the second trial.  
Positions in a nutshell  
Plaintiff  
[
3605] Plaintiff urges the Court to render a complete order on court costs pursuant to  
articles 466 and 477 of the Code of Civil Procedure. Apart from taxation, to the extent  
that the Court determines that a special fee is indicated, the only matter which should  
be left to a later date shall be the fixing of the quantum of the special fee under section  
3
856  
The issue of the special fee should be dealt with in the judgment,  
1
5 of the tariff.  
while a subsequent hearing might take place to deal with the quantum of that special  
3
857  
fee, if no agreement intervenes.  
[
3606] Plaintiff acknowledges that article 273.1 of the Code of Civil Procedure foresees  
the possibility, in exceptional cases or circumstances, to split the decision in an action.  
However, he argues this should not be done in his file. If judgment was rendered and  
the issue of costs or some portion of the issue of costs was left to a later date, one  
might argue that the Court is functus officio or one might argue rights to appeal should  
3
858  
only be exercised after all issues are decided , including all reliance and damages  
issues in all the pending cases: Plaintiff certainly wants to avoid such situations.  
[
3607] Plaintiff says Defendants should be condemned to pay all costs, including fees of  
all experts, the additional fee, a special fee, all stenographic and judicial fees relating to  
all examinations in discovery conducted in the Widdrington file, as well as in the Richter  
file and the files of the other Plaintiffs, where the testimony of various witnesses forms  
part of the Widdrington file, and all fees, costs and expenses relating to Rogatory  
Commission examinations.  
[
3608] Plaintiff argues the fact that arrangements were made to finance the pursuit of  
3859  
after the Widdrington case was chosen as “The case”, changes nothing.  
the litigation  
The Court has not to and should not take that into account.  
3855  
3856  
3857  
3858  
3859  
R.S.Q., c. C-25  
R.R.Q. [1981], c. B-1, r.13  
Representations, October 4, 2010, pp.1-26  
Article 273.2 C.C.P.  
PW-39  
500-05-001686-946  
PAGE: 744  
[
3609] Plaintiff concludes all costs (experts’ costs, transcription, etc.) were and had to  
be incurred to present the Widdrington case, namely as a result of the Defendants’  
positions and absence of cooperation. Defendants chose to act in such a way; they  
shall face the consequences of their own doings. Justice and equity require that all  
costs be part of the costs adjudicated to Widdrington, if the latter succeeds.  
[
3610] Plaintiff invites the Court to grant the following conclusions3860  
:
THE WHOLE WITH COSTS against the Defendants, including the costs relating to the  
original inquiry and hearing before the Honorable Justice Paul P. Carrière, which costs  
shall include the following:  
1.  
a special fee pursuant to section 15 of the Tariff of Judicial Fees (the  
"
Tariff");  
2.  
the additional fee, pursuant to section 42 of the Tariff, based on the  
amount of the condemnation herein in favour of the Plaintiff, The Estate of the  
Late Peter N. Widdrington;  
3.  
all costs of Plaintiff's experts; namely, Keith Vance (BDO Dunwoody LLP),  
Ken Froese (LECG), Lawrence S. Rosen (Rosen & Vettese Ltd.), Stephen A.  
Jarislowsky, Paul Lowenstein (Canadian Corporate Funding Ltd.), John Kingston  
(eMerging Capital Corp.) and Earl Cherniak (Lerners LLP), including costs for  
preparation of reports as well as preparation, assistance and attendance at either  
or both trials;  
4
(
0
.
all costs of examinations on discovery conducted (i) in the present case,  
ii), in the case of Richter and Associés Inc. vs. Elliot C. Wightman et als. (500-  
5-003843-933 (the "Richter Case") where such examinations form part of the  
present court record by Order of this Court dated January 7, 2008 (the "January  
Order") and (iii) in any other cases against the Defendants, where the  
7
transcripts of which, in whole or in part, were filed into the present record with the  
authorization of this Court;  
5.  
all costs of rogatory commission examinations conducted in the present  
case and in the Richter Case, where such latter examinations form part of the  
present court record pursuant to the January 7 Order;  
6.  
all costs of judicial stamps for various proceedings and subpoenas;  
7.  
all costs and expenses, including travel, lodging, meal and fees, of  
ordinary witnesses, in accordance with the Tariff;  
8.  
all costs and expenses related to exhibits, in accordance with the Tariff;  
3860  
Representations, October 4, 2010, pp. 22-26  
500-05-001686-946  
PAGE: 745  
9
1
1
.
all costs of translation in respect of the foregoing;  
0.  
all costs of stenography in respect of the foregoing; and  
1.  
all other costs in accordance with the Tariff not herein specifically referred  
to.  
Defendants  
[
3611] Given that the present judgment has binding effects on all the pending lawsuits  
as listed in Annex A of the minutes of trial of March 12, 2008), a unique situation,  
(
Defendants argue that the Court should postpone her decision on costs and that she  
has the power to do so since the Court has a discretion to “order otherwise” under  
section 477 of the Code of Civil Procedure and given the inherent powers of the Court.  
Defendants submit ordering otherwise could be deciding to postpone awarding  
costs3  
861  
.
[
3612] In order to achieve the above, Defendants invite the Court to proceed to a  
3862  
splitting of the action under article 273.1 C.C.P.  
[
3613] While the judgment rendered in the present file will end the debate on the  
common issues, Defendants say litigation is far from being finished since debates will  
continue on individual issues (reliance and damages), on a case by case basis, in the  
other files. Even if C&L was to be condemned to indemnify Widdrington, if Plaintiffs in  
the other cases do not discharge their burden of proof on reliance and damages,  
Defendants argue the court could conclude those cases should be dismissed.  
[
3614] Defendants plead a huge amount of time and money was invested to defend all  
claims given their collective financial impact. Had the Widdrington case been the only  
claim they had to face, Defendants might not have invested as much time and money.  
[
3615] Without the knowledge of the end results in all cases, Defendants invite the  
Court to postpone awarding costs.  
[
3616] Alternately, if the Court sees fit to adjudicate on costs, Defendants urge the Court  
to act prudently. Defendants suggest the Court should grant costs on a prorata basis:  
since Widdrington’s claim represents 0.4 of 1% of the total amount claimed, Widdrington  
should be granted costs on that basis. If the other Plaintiffs succeed, the same  
mechanics will apply – if any of the other Plaintiffs do not succeed, justice will be done  
to the Defendants.  
3
861  
862  
Representations, October 4, 2010, pp. 26-43  
Representations, October 4, 2010, p. 43  
3
500-05-001686-946  
PAGE: 746  
Analysis and Conclusion  
Applicable law  
[
3617] The Court was called upon to hear the Widdrington case re-entered on the roll  
pursuant to article 464 of the Code of Civil Procedure.  
[
3618] Given articles 466 and 477 of the Code of Civil Procedure, the Court shall rule on  
the costs of the first trial (trial that took place before Justice Paul Carrière between  
September 1998 and October 2006) and of the second trial (trial that took place before  
her between January 14, 2008 and October 4, 2010).  
4
66. The judge called upon to continue a case or matter assigned to him or to  
hear a case or matter re-entered on the roll pursuant to articles 464 and 465  
may, with the consent of the parties, limit the proof to the transcription of the  
stenographic notes, provided that, where he considers the notes to be  
insufficient, he recalls a witness or requires any other proof.  
He shall rule on the costs, including those relating to the original inquiry  
and hearing, according to circumstances, and may, in addition, take any other  
measure he considers fair and appropriate. Where, for the purposes of the first  
paragraph, the stenographic notes must be transcribed, the transcription costs  
shall be paid by the Government unless the judge orders otherwise, in particular,  
when the recourse is manifestly unfounded or frivolous and excessive or dilatory.  
(
our emphasis)  
4
77. The losing party must pay all costs, including the costs of the  
stenographer, unless by decision giving reasons the court reduces or  
compensates them, or orders otherwise.  
As well, the court may, by a decision giving reasons, reduce the costs relating to  
experts' appraisals requested by the parties, particularly if, in the opinion of the  
court, there was no need for the appraisal, the costs are unreasonable or a single  
expert's appraisal would have been sufficient. (…) (our emphasis)  
[
3619] As written in article 477, the losing party must pay all costs unless the court  
orders otherwise by decision giving reasons. Since ordering otherwise is an exception  
to a general rule, the burden rested on the Defendants to convince the Court that she  
should do so taking account all the circumstances of the case. Defendants have failed  
to discharge this burden.  
500-05-001686-946  
PAGE: 747  
[
3620] As article 15 of the tariff provides, “The Court may, upon request or ex officio,  
3863  
grant a special fee, in addition to all other fees, in an important case”.  
Defendants’ suggestion: postponement of ruling  
[
3621] As the Defendants suggested, the Court might have jurisdiction to postpone  
awarding costs.  
[
3622] At first glance, the following words of Justice André Forget, writing for the  
majority of the Court of Appeal in Pearl c. Gentra, supports Defendants’ position that  
awarding costs could be done in a second step, even maybe without splitting the action  
under article 273.1 C.C.P.:  
On doit, dans un premier temps, examiner l'article 477 C.p.c.; cet article, quant  
aux dépens, permet au juge «d'en décider autrement».  
On connaît la pratique souvent suivie par les tribunaux qui consiste à faire  
dépendre l'adjudication des dépens d'une démarche future: «frais réservés» ou  
«
frais à suivre».  
Dans le domaine des procédures frivoles ou manifestement mal fondées, ici en  
cause, le législateur a reconnu la possibilité de procéder en deux étapes. L'article  
7
5.2 C.p.c., récemment adopté, permet au tribunal de «réserver, dans le délai et  
aux conditions qu'il détermine, le droit de s'adresser par requête au tribunal  
compétent pour réclamer le montant des dommages-intérêts».  
De même, en appel, l'article 524 C.p.c. permet à notre Cour, si un appel est  
déclaré dilatoire et abusif et si les dommages-intérêts ne sont pas liquidés ou  
admis, d'autoriser l'intimé à s'adresser à la Cour supérieure ou à la Cour du  
Québec pour les réclamer.  
Le premier juge ne s'apprête donc pas à réviser une décision préalablement  
rendue, mais plutôt à trancher une demande sur laquelle il n'a pas encore statué.  
Gentra recherchait une condamnation aux dépens contre Tisserand et une autre  
contre Pearl & Associés. Le juge de la Cour supérieure a disposé de la première  
demande et a reporté l'audition sur la deuxième. Je ne peux voir quelle règle  
fondamentale l'empêcherait de procéder ainsi. (…)  
Le pouvoir d'en ordonner autrement (477 C.p.c.), en matière de dépens, me  
semble suffisant pour donner compétence au premier juge pour agir  
comme il l'a fait, surtout s'il estimait que l'intimée subirait une injustice  
grave en prolongeant l'audition sur la demande d'injonction permanente.  
3
863  
Banque canadienne impériale de Commerce c. Aztec Iron Corp., [1978] C.S. 266, [1978] R.P. 385,  
EYB 1978-145103, J.E. 78-94 (C.S.); Marc LÉGER, Mémoire de frais, Législation annotée, 3e  
Edition, Éditions Yvon Blais  
500-05-001686-946  
PAGE: 748  
Avec respect pour l'opinion contraire, j'estime que le premier juge, en  
prononçant une condamnation aux dépens contre Tisserand et en reportant sa  
décision sur la demande visant Pearl & Associés, a «décidé autrement»  
conformément à l'article 477 C.p.c.  
Je n'ignore pas qu'une simple «réserve de droits» n'ajoute généralement rien aux  
droits de la partie, mais, en l'espèce, lorsqu'on prend connaissance des motifs du  
premier juge, on voit bien qu'il a refusé de se prononcer immédiatement sur une  
demande dont il était saisi et qu'il a reporté l'audition pour permettre à Pearl &  
Associés de se défendre adéquatement.  
La procédure suivie par le premier juge ne me paraît donc pas contrevenir aux  
règles du Code de procédure civile; toutefois, il existe, selon moi, une raison plus  
fondamentale pour justifier la compétence du premier juge à se saisir et à  
3864  
disposer de la requête qui lui est présentée, c'est son «pouvoir inhérent» . (our  
emphasis)  
[
3623] However, in the same case, Justice Robert Pidgeon (as he then was),  
dissenting, wrote:  
Je conçois que l'amplitude de la compétence inhérente de la Cour supérieure  
autorise certains redressements judiciaires mais cette compétence porte une  
limitation temporelle infranchissable: la prononciation du jugement met un terme  
au conflit et marque la fin du contrat judiciaire des parties qui inclut l'adjudication  
3865  
des dépens  
.
[
3624] Defendants also find support for their proposition that adjudicating on costs might  
be done in a second step in the following judgments of our court:  
•
•
Centre de santé et de services sociaux de Sept-Îles c. P.T., [2008] QCCS,  
415;  
5
N-Xpress Canada Inc. (Syndic de) AZ-50309107, B.E. 2005BE-620  
[
3625] The issue and the Defendants’ proposition that it could be done are interesting  
legal questions. They are to be left for another day.  
[
3626] More than ever and in the circumstances of the present case, splitting the action  
must be ruled out.  
[
3627] Plaintiff’s point of view that adjudicating on costs is a matter of fairness, equity  
and justice must prevail.  
3
864  
865  
Pearl c. Gentra Canada Investments Inc. AZ-98011477, J.E. 98-1260, [1998] R.L. 581, motion for  
leave to appeal at the Supreme Court dismissed (C.S. Can., 1999-02-18), 26807  
3
Pearl c. Gentra Canada Investments Inc. AZ-98011477, J.E. 98-1260, [1998] R.L. 581, motion for  
leave to appeal at the Supreme Court dismissed (C.S. Can., 1999-02-18), 26807  
500-05-001686-946  
PAGE: 749  
Defendants’ alternate proposition: a prorata ruling  
[
3628] The Court dismisses the Defendants suggestion that she should grant costs on a  
prorata basis.  
[
3629] To succeed, Plaintiff had to prove fault, damage and causality. The burden of  
proof rested on him as Defendants repeatedly reminded the Court and his counsel. The  
case was complex and establishing the relevant facts without resorting to numerous  
admissions was quite a challenge. Defendants elected to defy Plaintiff to do it, as it was  
3
866  
their right ; it is just fair that they live with the consequences of the choice they made  
now that Plaintiff has succeeded.  
[
3630] Plaintiff had no choice but to resort to expert testimonies in numerous and  
various fields of expertise. Plaintiff had to ask those experts to deal with the situation,  
without the benefit of a series of clear uncontested facts or admissions. As the Court  
writes at paragraph 21 of this judgment, “Writing clear and complete but concise  
reasons represents a titanic challenge”. Each of the experts that appeared before the  
Court had to face a similar challenge, Plaintiff’s experts as well as Defendants’ experts.  
[
3631] With the benefit of hindsight, one could think or suggest that the case should  
have unwound differently.  
[
3632] However, relying on hindsight is discarded. This case started in 1994 and more  
than 50% of the first trial took place at times when our rules of civil procedure did not  
include the following specific provisions (which are now part of our Code since 2003)  
relating to trial management, to proportionality and to an active role of the judge to  
ensure proper management.  
4
.1 Subject to the rules of procedure and the time limits prescribed by this Code,  
the parties to a proceeding have control of their case and must refrain from  
acting with the intent of causing prejudice to another person or behaving in an  
excessive or unreasonable manner, contrary to the requirements of good faith.  
The Court sees to the orderly progress of the proceeding and intervenes to  
ensure proper management of the case.  
4
.2 In any proceeding, the parties must ensure that the proceedings they  
choose are proportionate, in terms of the costs and time required, to the  
nature and ultimate purpose of the action or application and to the complexity of  
the dispute; the same applies to proceedings authorized or ordered by the judge.  
(
our emphasis)  
3
866  
In compliance with articles 6 and 7 of the Quebec Civil code and compliance with articles 4.1, 4.2 and  
.3 of the Code of Civil Procedure  
4
500-05-001686-946  
PAGE: 750  
[
3633] The present judgment ends the debate on the common issues. Those issues  
were the ones for which most of the experts’ costs were incurred. Again, in assessing  
the costs of expert evidence, the Court must be careful as the Court of Appeal said  
3
867  
recently in Michaud c. Équipements ESF inc.  
[
3634] Neither the Plaintiff nor the Defendants have challenged the quantum of the  
professional services rendered by the experts that appeared before the Court even  
though all invoices were introduced in evidence. Comparing one invoice with the other,  
comparing Plaintiff experts’ invoices with Defendants experts’ invoices, confirms time  
spent and hourly rates are alike.  
[
3635] There is not a doubt that the reports and the testimonies of the Plaintiff’s experts  
were useful. In fact, in the circumstances of the case, they were necessary. Therefore  
the Court finds that all experts’ costs should be part of the costs adjudicated to Plaintiff.  
[
3636] This case is an important case: it satisfies many, if not all of the twenty-three  
criteria developed in the case of Banque canadienne impériale de Commerce c. Aztec  
3
868  
Iron Corp. : Plaintiff is well founded to request a special fee under article 15 of the  
tariff. While acknowledging the right to a special fee will form part of the conclusions of  
this judgment, establishing the quantum will only be done at a later date and at the  
written request of the parties, if they cannot agree and as suggested.  
[
3637] Defendants say litigation is far from being finished since debates will continue on  
individual issues (reliance and damages), on a case by case basis, in the other files.  
They might be right. They might be wrong. They have to remember that litigating all the  
other files is only one of multiple options. Now that the litigants have on hand answers  
to all common issues, resolving the remaining conflicts otherwise is clearly an option  
(
for example, resorting to alternative modes of conflict resolution).  
[
3638] Now that the answers to common issues are known, Defendants argue it could  
still happen that a court will dismiss a plaintiff’s claim in the pending cases, if the plaintiff  
does not discharge his or her burden to prove damages or reliance, and they are right.  
However, it does not justify this Court to reduce the costs in the present file even though  
it might allow the Defendants to claim costs in any of the pending files, a question left  
for further adjudication by the judge who will be hearing the case.  
Conclusion  
[
3639] The Court sees no reason why she should exercise her discretion in order to  
mitigate costs. Plaintiff’s position prevails: the Court grants the conclusions he has  
suggested, which are reproduced hereinabove.  
3
867  
868  
Michaud c. Équipements ESF inc. [2010] QCCA 2350, see namely paragraphs 98 and following -  
Justice France Thibault discussing adjudication on costs of experts and hindsight  
3
[1978] C.S. 266, [1978] R.P. 385, EYB 1978-145103, J.E. 78-94 (C.S.);  
5
00-05-001686-946  
FOR THESE REASONS, THE COURT:  
On common issues  
PAGE: 751  
DECLARES that:  
•
•
•
•
•
•
•
•
•
•
•
the audited consolidated financial statements of Castor for 1988 are materially  
misstated and misleading;  
the audited consolidated financial statements of Castor for 1989 are materially  
misstated and misleading;  
the audited consolidated financial statements of Castor for 1990 are materially  
misstated and misleading;  
C&L failed to perform their professional services as auditors for 1988 in  
accordance with the generally accepted auditing standards (“GAAS”);  
C&L failed to perform their professional services as auditors for 1989 in  
accordance with GAAS;  
C&L failed to perform their professional services as auditors for 1990 in  
accordance with GAAS;  
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1988 (valuation letters and certificate for Legal for Life Opinion);  
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1989 (valuation letters and certificate for Legal for Life Opinion);  
C&L issued various other faulty opinions relating to Castor’s financial position  
during 1990 (valuation letters and certificate for Legal for Life Opinion) ;  
C&L issued various faulty opinions relating to Castor’s financial position during  
1991 (valuation letters and certificate for Legal for Life Opinion);  
The governing law is Quebec civil law;  
500-05-001686-946  
PAGE: 752  
Specifically on Plaintiff’s claim  
CONDEMNS the Defendants to pay jointly and severally to the Plaintiff the amount  
of two million six hundred and seventy-two thousand nine hundred and sixty dollars  
(
$2,672,960.00) together with interest and the additional indemnity from the date of  
service of the statement of claim;  
THE WHOLE WITH COSTS against the Defendants, including the costs relating to  
the original inquiry and hearing before the Honorable Justice Paul P. Carrière,  
which costs shall include the following:  
•
A special fee pursuant to section 15 of the Tariff of Judicial Fees (the  
Tariff");  
"
•
The additional fee, pursuant to section 42 of the Tariff, based on the  
amount of the condemnation herein in favour of the Plaintiff, The Estate of  
the Late Peter N. Widdrington;  
•
•
All costs of Plaintiff's experts; namely, Keith Vance (BDO Dunwoody LLP),  
Ken Froese (LECG), Lawrence S. Rosen (Rosen & Vettese Ltd.), Stephen  
A. Jarislowsky, Paul Lowenstein (Canadian Corporate Funding Ltd.), John  
Kingston (eMerging Capital Corp.) and Earl Cherniak (Lerners LLP),  
including costs for preparation of reports as well as preparation,  
assistance and attendance at either or both trials;  
All costs of examinations on discovery conducted (i) in the present case,  
(
ii), in the case of Richter and Associés Inc. vs. Elliot C. Wightman et als.  
500-05-003843-933 (the "Richter Case") where such examinations form  
(
part of the present court record by Order of this Court dated January 7,  
2
008 (the "January 7 Order") and (iii) in any other cases against the  
Defendants, where the transcripts of which, in whole or in part, were filed  
into the present record with the authorization of this Court;  
•
All costs of rogatory commission examinations conducted in the present  
case and in the Richter Case, where such latter examinations form part of  
the present court record pursuant to the January 7 Order;  
•
•
All costs of judicial stamps for various proceedings and subpoenas;  
All costs and expenses, including travel, lodging, meal and fees, of  
ordinary witnesses, in accordance with the Tariff;  
•
•
All costs and expenses related to exhibits, in accordance with the Tariff;  
All costs of translation in respect of the foregoing;  
500-05-001686-946  
PAGE: 753  
•
•
All costs of stenography in respect of the foregoing; and  
All other costs in accordance with the Tariff not herein specifically referred  
to.  
_
____________________________  
Marie St-Pierre, S.C.J.  
PLAINTIFF  
Me Avram Fishman  
Me Leonard W. Flanz  
Me Mark Meland  
Me Gilles Paquin  
Me Margo Siminovitch  
Me Tina Silverstein  
Me Nicolas Brochu  
Fishman Flanz Meland Paquin  
1
250, boul. René-Lévesque Ouest, bureau 4100  
Montréal (Québec) H3B 4W8  
OTHER PLAINTIFFS (pending lawsuits)  
Me Jack Greenstein, c.r.  
Procureur de Chrysler  
Me Véronique Ranger (pour Me Greenstein)  
Gowling Lafleur Henderson  
1
, Place Ville-Marie, 37e étage  
Montréal (Québec) H3B 3P4  
Me Stephen W. Hamilton  
Avocat conseil Chrysler  
Stikeman, Elliott s.e.n.c.r.l., s.r.l.  
1
155, boul. René-Lévesque Ouest, bureau 4000  
Montréal (Québec) H3B 3V2  
Me Raynold Langlois, Ad. E  
Langlois Kronström Desjardins  
Tour Scotia  
1
002, rue Sherbrooke Ouest, 28e étage  
Montréal (Québec) H3A 3L6  
Me Charles E. Flam  
500-05-001686-946  
PAGE: 754  
Me Martin Côté  
Robinson Sheppard Shapiro s.e.n.c.r.l.  
Place Victoria  
8
00, Square Victoria, bureau 4600  
C.P. 322, Succursale Tour de la Bourse  
Montréal (Québec) H4Z 1H6  
Me Sylvie Boulanger  
Me Philippe d'Etcheverry  
Lavery  
6
00, rue de La Gauchetière Ouest, bureau 2400  
Montréal (Québec) H3B 4L8  
DEFENDANTS  
Me Gary S. Rosen  
Me Yvan Bolduc  
Me Serge Gaudet  
Me Tibor Holländer  
Me Max R. Bernard  
Me Guy Sarault  
Me Marie-Josée Hogue  
Me Sophie Gallizioli  
Heenan Blaikie s.e.n.c.r.l., srl  
1
250, boul. René-Lévesque Ouest, bureau 2500  
Montréal (Québec) H3B 4Y1  
Me Mindy Paskell-Mede  
Avocat conseil  
Nicholl Paskell-Mede  
6
30, boul. René-Lévesque Ouest, bureau 1700  
Montréal (Québec) H3B 1S6  
500-05-001686-946  
PAGE: 755  
CANADA  
PROVINCE OF QUEBEC  
DISTRICT OF MONTREAL  
NO: 500-05-001686-946  
Estate of late Peter N. Widdrington  
Plaintiff  
c.  
Elliot C. Wightman et al  
Defendants  
SCHEDULE 1  
Alphabetical list of names, abbreviations  
and main technical expressions  
500-05-001686-946  
PAGE: 756  
Schedule 1  
Alphabetical list of names, abbreviations  
and main technical expressions  
A
ACC  
Airport Corporate Centre  
Leonard Alksnis  
Alksnis  
AWPs  
Audit working papers  
B
Edwin Banziger  
Banziger  
Binch  
Blake  
BMO  
James Binch  
Harold James Blake  
Bank of Montreal  
Banque nationale de Paris  
BNP  
C
CA  
Chartered accountant  
Campion  
Camrost  
CBICA  
CBV  
John Campion  
Camrost Office Developments (Lakeshore) Limited  
Canadian and British Insurance Companies Act  
Chartered business valuator  
Crédit commercial de France  
CCF  
500-05-001686-946  
PAGE: 757  
CCLC  
CDC  
Civil Code of Lower Canada  
Canada Development Corporation  
Castor Finance AG  
CFAG  
CFO  
Chief financial officer  
Cherniak  
Earl A. Cherniak  
CHIBV &  
CHINBV  
CH International Netherlands BV  
CHIF & CHIF NV CH International Finance NV  
CHII  
CH Ireland Inc.  
CHIO  
CHL  
CIBC  
CH International Overseas Ltd.  
Castor Holding Limited  
Canadian Imperial Bank of Commerce  
CICBV  
C&L  
Canadian Institute of Chartered Business Valuators  
Coopers & Lybrand or Coopers  
Chur  
Chur Investments Limited  
CICA  
Canadian Institute of Chartered Accountants  
Certified Public Accountant  
CPA  
CSH  
Calgary Skyline Hotel or Calgary Skyline  
William P. Cunningham  
Cunningham  
D
David T. Smith  
David Smith  
Dragonas  
George Dragonas  
500-05-001686-946  
PAGE: 758  
DT Smith  
DT Smith group of companies  
E
Edper  
Edper Investments Ltd.  
F
FCBV  
Fellow chartered business valuator  
First Interstate Bank of Canada  
Fred Fitzsimmons  
FICAN  
Fitzsimmons  
Froese  
Kenneth Froese  
G
GA  
General appraisal  
GAAP  
Generally accepted accounting principles  
Generally accepted auditing standards  
Marco Gambazzi  
GAAS  
Gambazzi  
G L  
General ledger  
Global  
Goodman  
Goulakos  
Gourdeau  
Gross  
Global Management Limited  
Russell Goodman  
Socrates Goulakos  
Bernard Gourdeau  
Ernst Gross  
500-05-001686-946  
PAGE: 759  
H
Hajiroussos  
Hercules  
Antonio Hajiroussos  
Hercules Managements Ltd. v. Ernst & Young  
R. W. Hughes & Associates Inc.  
Hughes report  
J
Jarislowsky  
JE#6  
Stephen A. Jarislowsky  
Journal entry number 6  
Journal entry number 12  
Jet Lease 900  
JE#12  
Jet Lease  
Johnson  
Jurg Bänziger  
Clifford Johnson  
Jurg Bänziger  
K
Christa Karl  
Karl  
Kingston  
KK  
John Kingston  
Konto kurrents  
KVWIL  
KVW Investment Limited  
L
John Labatt Limited  
Alain Lajoie  
Labatt  
Lajoie  
Lakeland  
Lakeland Inc.  
500-05-001686-946  
PAGE: 760  
Lambert  
Lapointe  
Lee  
Lambert Securities Inc.  
Alain Lapointe  
Soo Kim Lee  
LEQ  
Loan evaluation questionnaires  
Phillip Levi  
Levi  
Lincoln  
LIQ  
Lincoln North & Company Ltd.  
Loan information questionnaires  
Loan loss provision  
Paul J. Lowenstein  
LLP  
Lowenstein  
LTV  
Loan to value ratio  
M
Mackay  
MAPs  
Barry Mackay  
Matters for attention of partners  
Montreal Eaton Center  
Mellon Bank Canada  
Maple Leaf Village  
MEC  
Mellon  
MLV  
MLVII  
Mapel Leaf Village Investments Inc.  
Donald C. Morrison  
James Moscowitz  
Morrison  
Moscowitz  
Mullins  
R. B. Mullins  
500-05-001686-946  
PAGE: 761  
O
O'Connor  
OSH  
Ingrid O'Connor  
Ottawa Skyline Hotel  
P
Petra  
Petra Investments Limited  
Pannell Kerr Forster  
PKF  
PKF Report  
Pannell Kerr Forster Market Position Study  
(1988)  
Prikopa  
Heinz Prikopa  
Prychidny  
Walter Prychidny  
R
Cynthia Rancourt  
Christine Renaud  
Rogoff & Company  
Ronald Smith  
Rancourt  
Renaud  
Rogoff  
Ron Smith  
Rosen  
Lawrence S. Rosen  
Related party transactions  
RPTs  
S
SAAE  
Sufficient appropriate audit evidence  
500-05-001686-946  
PAGE: 762  
SCFP  
Statement of changes in financial position  
Statement of changes in Net Investment Assets  
Donald Selman  
SCNIA  
Selman  
Simon  
Manfred Simon  
Skyeboat  
Sloppin  
Skyline 80  
Skyview  
Stolzenberg  
Strassberg  
Skyeboat Investments Ltd.  
Sloppin Investments Limited  
Skyline Hotels (1980)  
Skyview Hoteld Limited  
Wolfgang Stolzenberg  
Ira Strassberg  
T
Taylor  
George Taylor  
TMF  
Trust Management and Finance  
The Toronto Skyline Triumph  
Ruth Tooke  
The Triumph  
Tooke  
Topven  
Topven 88  
Trinity  
TSH  
Topven Holdings Ltd.  
Topven Holdings (1988) Inc.  
Trinity Capital Corporation  
Toronto Skyline Hotel  
TWTC  
Toronto World Trade Center  
Toronto World Trade Centre Inc.  
TWTCI  
500-05-001686-946  
PAGE: 763  
TWTCLP  
TWDC  
Toronto World Trade Centre Limited Partnership  
Toronto Waterfront Development Corp.  
V
Vance  
VTB  
Keith Vance  
Vendor Take Back mortgage  
W
West Edmonton Mall  
Karsten Von Wersebe  
David Whiting  
WEM  
Wersebe  
Whiting  
Widdrington  
Wightman  
Wood  
Peter N. Widdrington  
Elliot Wightman  
Bill Wood  
Wost group or  
WOST group  
Wost group of companies  
Y
YHAL  
YHDHL  
YHDL  
YHHI  
York-Hannover Amusement Ltd.  
York-Hannover Developments Holdings Ltd.  
York-Hannover Developments Ltd.  
YHH Investments  
YHHL  
York-Hannover Holdings Ltd.  
500-05-001686-946  
PAGE: 764  
YHHL  
York-Hannover Hotels Ltd.  
YHHHL  
YHLP  
York-Hannover Hotels Holdings Ltd.  
York-Hannover Leisure Properties Ltd.  
York Hannover companies  
YH Group  
YH Hotels  
York-Hannover Hotels  
Z
Zampelas  
Michael Zampelas  
166505  
321351  
594369  
606752  
607670  
612044  
687292  
696604  
705743  
752608  
97872  
166505 Canada Inc.  
321351 Alberta Ltd.  
594369 Ontario Inc.  
606752 Ontario Ltd.  
607670 Ontario Inc.  
612044 Ontario Ltd.  
687292 Ontario Ltd.  
696604 Ontario Ltd.  
705743 Ontario Ltd.  
752608 Ontario Limited  
97872 Canada Inc.  
500-05-001686-946  
PAGE: 765  
CANADA  
PROVINCE OF QUEBEC  
DISTRICT OF MONTREAL  
NO: 500-05-001686-946  
Estate of late Peter N. Widdrington  
Plaintiff  
c.  
Elliot C. Wightman et al  
Defendants  
SCHEDULE 2  
Detailed Table of Contents  
500-05-001686-946  
PAGE: 766  
THE CASE IN A NUTSHELL  
Plaintiff’s position  
2
4
Defendants’ position  
5
THE JUDGMENT’S CONTENT (ROAD-MAP AND FEATURES)  
5
7
Road-map  
Features  
8
HISTORICAL BACKGROUND  
COURT’S MAIN CONCLUSIONS  
8
9
WHO’S WHO  
10  
10  
Castor  
Stolzenberg , the Wost group and O’Connor  
13  
Ron Smith, Simon and MacKay  
15  
15  
16  
16  
Ron Smith  
Simon  
MacKay  
Dragonas and Goulakos  
Bänziger and Gross  
Gambazzi  
17  
18  
18  
Coopers - Castor’s audit teams and Coopers Partners in other jurisdictions  
Castor’s audit teams  
19  
19  
19  
20  
20  
20  
20  
21  
22  
The 1988 audit teams  
The 1989 audit teams  
The 1990 audit teams  
Coopers’ partners in other jurisdictions  
William P. Cunningham  
Clifford Johnson  
Antonio Hajiroussos and Michael Zampelas  
YH Group, Wersebe, Whiting and Prychidny  
22  
YH group  
22  
500-05-001686-946  
PAGE: 767  
Wersebe  
Whiting  
Prychidny  
23  
23  
24  
DT Smith, David Smith, Moscowitz and Strassberg  
24  
24  
24  
25  
25  
DT Smith  
David Smith  
Moscowitz  
Strassberg  
MC Lean & Kerr  
26  
Some Real estate properties financed by Castor  
Montreal Eaton Center  
Maple leaf Village  
26  
26  
28  
29  
31  
33  
34  
35  
Toronto Skyline  
Toronto World Trade Center  
Calgary Skyline Hotel  
Ottawa Skyline Hotel  
DT Smith projects  
Other properties  
Meadowlark  
38  
38  
39  
39  
Hazelton Lanes  
Toronto Skyline Triumph  
THE ISSUES AND THE TASK  
The issues and their components  
The task  
39  
39  
40  
THE NEGLIGENCE ISSUE  
40  
General considerations  
40  
41  
41  
42  
42  
42  
Difference between negligence and error of judgment  
Importance of the professional standards  
Solution where there are different schools of thought  
Warning against hindsight and today’s professional standards  
Respective role of management and auditor  
Books and records  
44  
44  
57  
Castor’s books and records  
YH books and records  
THE NEGLIGENCE ISSUE AS IT RELATES TO THE AUDITED CONSOLIDATED FINANCIAL  
STATEMENTS  
58  
58  
Questions and tools  
500-05-001686-946  
PAGE: 768  
Overview of expert opinions on GAAP and GAAS  
58  
58  
58  
59  
60  
60  
61  
61  
62  
62  
63  
64  
64  
66  
66  
66  
66  
67  
68  
72  
73  
73  
75  
79  
Plaintiff’s experts  
Vance  
Froese  
Rosen  
Defendants’ experts  
Selman  
Goodman  
Levi  
General observations on available experts’ opinions  
General observations on expert evidence  
Credibility and reliability of expert evidence  
Legal principles and tools to assess credibility and reliability  
Assessment of credibility and reliability  
Plaintiff’s experts  
General comments  
Vance  
Froese  
Rosen  
Defendants’ experts  
General comments  
Selman  
Goodman  
Levi  
Are the audited consolidated financial statements of Castor for 1988, 1989 and 1990 materially misstated and  
misleading?  
82  
82  
84  
84  
84  
85  
85  
85  
86  
87  
87  
87  
88  
89  
90  
90  
90  
91  
91  
91  
92  
92  
92  
95  
Conclusion  
General state of affairs – 1988, 1989 and 1990  
Loan portfolio  
Loan commitment and renewal letters - covenants  
Security profile  
State of projects  
Financial situation of borrowers  
Capitalized interest and fee income  
Loan loss provisions  
Applicable GAAP rules (in a nutshell)  
Nature and sources of GAAP  
Other Financial statements concepts (section 1000)  
General standards of financial presentation (section 1500)  
Disclosure of accounting policies (section 1505)  
Statement of changes in financial position (section 1540)  
Accounts and Notes receivables (Section 3020)  
Revenue (section 3400)  
Subsequent events (section 3820)  
Related party transactions and economic dependence (section 3840)  
Interests Capitalized (section 3850)  
The 1988 audited financial statements  
Some Figures and notes content of the 1988 statements  
Materially misstated (1988)  
500-05-001686-946  
PAGE: 769  
Absence of a Statement of Changes in Financial Position showing the sources and uses of cash and cash  
equivalents  
Historical information  
95  
96  
Positions (in a nutshell)  
102  
102  
102  
106  
107  
107  
113  
116  
117  
117  
117  
117  
118  
120  
121  
122  
123  
128  
128  
129  
130  
131  
131  
137  
138  
139  
142  
143  
143  
143  
144  
145  
145  
147  
147  
147  
148  
148  
148  
149  
149  
152  
154  
154  
154  
154  
154  
Vance and Rosen  
Vance  
Rosen  
Selman  
A SCFP was required  
Undisclosed related party transactions  
Artificial improvements of liquidity and undisclosed restricted cash  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Evidence – Maturity matching notes 2, 3 and 4  
CHL- Skyeboat and 321351 Alberta  
CHIBV- Lambert and Skyview  
CHIO – DT Smith – Tennis Court Villas and Wood Ranch  
CHL- National Bank, Société Générale and Caisse Centrale Desjardins  
CHIBV- White  
CHIBV- Gambazzi  
CHIBV- Pinecrest  
CHIBV - Bayerische Bank  
CHIBV - Berliner Bank  
Ford’s testimony  
Relevant evidence - Other elements  
Credibility issue –Ford’s testimony  
Credibility issue – Selman’s propositions  
Conclusions  
Liquidity improvements (100 million debentures)  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Evidence – The 100 million debentures  
The transaction  
The transaction and the 1988 financial statements  
Experts’ opinions  
Conclusion  
Undisclosed restricted cash  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Evidence  
Conclusions  
Undisclosed Capitalised interest and inappropriate revenue recognition  
General context  
Issue  
Positions (in a nutshell)  
Plaintiff  
500-05-001686-946  
PAGE: 770  
Defendants  
Evidence  
Exhibits and lay witness’ evidence  
155  
157  
157  
158  
159  
160  
160  
160  
166  
166  
167  
169  
170  
171  
173  
Planned and unplanned capitalization  
C&L internal material  
C&L’s peer review (Castor’s 1987 audit)  
Capitalized interest and the audit teams  
Section 1500.05  
Section 3850  
The audit report over the years  
What others did  
Experts’ evidence  
Plaintiff’s experts  
Defendants’ expert  
Conclusions  
Understatement of Loan loss provisions and overstatement of carrying value of Castor’s loan portfolio  
and equity 178  
Question and answer at the heart of the matter  
178  
178  
179  
179  
179  
180  
180  
182  
183  
183  
183  
183  
185  
189  
190  
191  
191  
192  
193  
197  
197  
197  
198  
198  
199  
199  
200  
201  
202  
202  
203  
203  
204  
Question  
Answer  
Positions in a nutshell  
Plaintiff  
Defendants  
Experts’ figures  
Discussion  
MLV  
Experts’ positions  
Additional evidence specific to MLV  
Prior to 1988  
1
988 Events  
Loans as of December 31, 1988  
Interests recognized as revenue  
Loans and commitment letters  
MLV appraisals  
Other information  
Experts’ evidence  
Conclusions  
Value and minimum deficiency before other recovery sources  
Other possible sources of recovery  
Required LLP  
YH Corporate loans  
Additional evidence specific to the YH corporate loans  
CFAG loans (20 million) prior to 1988  
Account 046 (Before 1988)  
Castor and YH : “equity partners” prior to 1988  
1
986 year-end re-allocation  
Loan 1081 prior to 1988  
Loan 1092 prior to 1988  
Loan 1090 prior to 1988  
Financial situation - 1987 year-end  
500-05-001686-946  
PAGE: 771  
Loan 1092 (during 1988)  
Loan 1123 (during 1988)  
204  
205  
205  
205  
206  
207  
207  
207  
208  
209  
209  
209  
210  
210  
211  
211  
213  
215  
216  
217  
221  
221  
221  
222  
222  
223  
223  
224  
225  
226  
228  
229  
229  
229  
230  
231  
231  
231  
235  
238  
239  
239  
241  
241  
241  
241  
243  
244  
246  
246  
Loan 1091 (Hazelton Lanes) during 1988  
CFAG loans (20 million) in 1988  
YH borrowers’ insolvency - 1988  
YHDL – 1988 financial statements - adverse audit opinion  
Account 046 (1988)  
1
988 Year-end “cash circle”  
Loans as of December 31, 1988  
Interests recognized as revenue (1988)  
Loans and commitment letters  
Books and records  
Wersebe’s guarantees  
Other information  
Experts’ evidence  
Vance  
Froese  
Rosen  
Goodman  
Conclusions  
MEC  
Additional evidence specific to MEC  
Loans as of December 31, 1988  
Interests recognized as revenue  
Loan documents and commitment letters  
Budget, completion date and status reports  
Events taking place during 1988  
MEC appraisals  
Other information  
Experts’ evidence  
Conclusions  
TSH  
Additional evidence specific to TSH  
Beneficial ownership  
Loans as of December 31, 1988  
Interests recognized as revenue by Castor in 1988 on loans relating to TSH  
Loans and commitment letters  
Prior to 1988  
Events taking place during 1988  
TSH appraisals  
Other information  
Experts’ evidence  
Conclusions  
CSH  
Additional evidence specific to CSH  
Beneficial Ownership  
Prior to 1988  
Events taking place during 1988  
Loans as of December 31, 1988  
Interests recognized as revenue  
500-05-001686-946  
PAGE: 772  
Loans and commitment letters  
246  
247  
247  
247  
249  
249  
249  
249  
250  
251  
251  
251  
252  
252  
253  
253  
255  
255  
255  
255  
255  
255  
256  
257  
257  
258  
258  
259  
261  
261  
261  
262  
263  
263  
264  
264  
265  
265  
265  
266  
266  
267  
267  
267  
268  
268  
269  
270  
271  
271  
CSH: market study  
Other information  
Experts’ evidence  
Conclusions  
OSH  
Additional evidence specific to OSH  
Prior to 1988  
Events taking place during 1988  
Loans as of December 31, 1988  
Interests recognized as revenue  
Loans and commitment letters  
OSH appraisals  
Other information  
Experts’ evidence  
Conclusions  
TWTC  
Positions in a nutshell  
Plaintiff  
Defendants  
Additional evidence  
Loans as of December 31, 1988 and security  
Loan 1046  
Loan 1067  
Loan 1090  
Loan 1120  
Prior to 1988  
1
988 events  
Appraisals  
Loan covenants  
Experts’ opinions  
Vance  
Rosen  
Goodman  
Interests recognized as revenue  
Conclusions  
Meadowlark  
Positions in a nutshell  
Plaintiff  
Defendants  
Evidence  
Loans as of December 31, 1988  
Interests recognized as revenue  
Prior to 1988  
1
988 Events  
Appraisals  
Experts’ evidence  
Conclusions  
1
989 financial statements  
Some figures and notes content of the 1989 statements  
500-05-001686-946  
PAGE: 773  
Materially misstated (1989)  
273  
273  
273  
273  
274  
275  
275  
275  
275  
276  
276  
277  
278  
280  
280  
281  
283  
283  
283  
284  
284  
284  
284  
285  
286  
286  
Absence of a SCFP showing the sources and uses of cash and cash equivalents  
Undisclosed related party transactions  
66505 Canada Inc.  
1
Jet lease 900  
Artificial improvements of liquidity and undisclosed restricted cash  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Maturity changes made in 1989  
Specific additional evidence  
CHL bank loans  
CHIF bank loans  
Notes payable  
Experts’ opinions – Maturity notes 2, 3 and 4  
Conclusions  
Liquidity improvements (100 million debentures)  
Undisclosed restricted cash  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Evidence  
Experts’ evidence  
Conclusions  
Undisclosed Capitalised interests and inappropriate revenue recognition  
Understatement of LLP and overstatement of carrying value of Castor’s loan portfolio and equity 286  
Positions in a nutshell  
Experts’ figures  
Analysis and Conclusions  
MLV  
287  
287  
289  
289  
289  
289  
289  
292  
294  
294  
295  
297  
297  
298  
298  
298  
299  
299  
302  
302  
303  
303  
304  
Experts’ positions  
Additional evidence specific to MLV  
1
989 Events  
Loans as of December 31, 1989  
Interests recognized as revenue  
Appraisals 1989  
Experts’ evidence  
Conclusions  
Value and minimum deficiency before other recovery sources  
Other possible sources of recovery  
YH Corporate loans  
Experts’ positions  
Additional evidence specific to YH Corporate loans  
1
989 events  
Loans as of December 31, 1989  
Interests recognised as revenue  
Experts’ evidence  
Vance  
Froese  
500-05-001686-946  
PAGE: 774  
Rosen  
306  
306  
306  
306  
307  
307  
307  
308  
308  
309  
311  
311  
311  
312  
312  
313  
314  
314  
314  
315  
315  
315  
316  
316  
316  
317  
317  
317  
317  
319  
319  
319  
320  
320  
320  
320  
320  
322  
323  
323  
323  
324  
324  
324  
325  
325  
325  
326  
326  
326  
Goodman  
Conclusions  
MEC  
Experts’ positions  
Plaintiff’s experts  
Goodman  
Additional evidence specific to MEC  
Generalities  
Specific facts of 1989  
Loans as of December 31, 1989  
Interests recognised as revenue  
Conclusions  
TSH  
Experts’ positions  
989 events  
1
Loans as of December 31, 1989  
Interests recognised as revenue  
Appraisals 1989  
Conclusions  
CSH  
Experts’ positions  
Additional evidence specific to CSH  
1
989 events  
Loans as of December 31, 1989  
Interests recognised as revenue  
Conclusions  
OSH  
Experts’ positions  
Additional evidence specific to OSH  
1
989 events  
Loans as of December 31, 1989  
Interests recognised as revenue  
Conclusions  
TWTC  
Additional evidence specific to TWTC  
989 events  
1
Loans as of December 31, 1989  
Experts’ position  
Conclusions  
Meadowlark  
Additional evidence  
1
989 events  
Loans as of December 31, 1989  
Interest recognized as revenue  
Experts’ positions  
Conclusions  
990 financial statements  
Some specific facts of 1990  
Some figures and notes content of the 1990 statements  
1
500-05-001686-946  
PAGE: 775  
Materially misstated (1990)  
329  
329  
329  
330  
330  
330  
330  
330  
331  
331  
331  
331  
332  
332  
333  
333  
333  
333  
333  
333  
334  
335  
336  
336  
Absence of a SCFP showing the sources and uses of cash and cash equivalents  
Undisclosed related party transactions  
Artificial improvements of liquidity and undisclosed restricted cash  
•
The undisclosed restricted cash in the amount of $58 million ($50 US).  
Liquidity improvements (notes 2, 3 and 4)  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Maturity changes made in 1990  
Specific additional evidence  
Bristol Note  
Tara Notes  
Experts’ opinions  
Conclusions  
Liquidity improvements (100 million debentures)  
Undisclosed restricted cash  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Additional evidence relating to restricted cash in 1990  
Experts’ evidence  
Conclusions  
Undisclosed Capitalised interest and inappropriate revenue recognition  
Understatement of LLP and overstatement of carrying value of Castor’s loan portfolio and equity 337  
Positions in a nutshell  
337  
338  
340  
340  
340  
341  
341  
346  
351  
352  
353  
353  
354  
357  
359  
359  
359  
360  
360  
362  
362  
363  
363  
376  
377  
Experts’ figures  
Evidence – State of the Canadian and the American economies at the end of 1990  
Lapointe  
Who’s who  
Objections and judgement rendered on December 7, 2009  
Expert Evidence  
Lay witness evidence  
C&L minimal knowledge as of December 31, 1990  
Road map  
MLV  
Experts’ positions  
Additional evidence specific to MLV  
Loans as of December 31, 1990  
Revenue recognition – capitalized interest  
Conclusions  
YH Corporate loans (excluding the “Nasty nine loans”)  
Experts ‘positions  
Events of 1990  
Loans as of December 31, 1990  
Conclusions  
The “Nasty nine”  
Events of 1990  
Loans as of December 31, 1990  
Experts positions  
500-05-001686-946  
PAGE: 776  
Vance  
Froese  
Rosen  
Selman  
Levi  
377  
379  
379  
380  
381  
381  
382  
383  
383  
385  
386  
386  
386  
386  
386  
387  
387  
388  
388  
389  
390  
391  
391  
391  
391  
392  
393  
393  
394  
394  
394  
394  
395  
395  
395  
395  
396  
396  
396  
396  
396  
397  
397  
397  
398  
398  
398  
398  
398  
398  
Goodman  
Conclusions  
MEC  
Events of 1990  
Loans as of December 31, 1990  
Appraisal  
Experts’ opinion  
Vance  
Froese  
Rosen  
Goodman  
Conclusions  
TSH  
Experts’ positions  
990 events  
1
Loans as of December 31, 1990  
Appraisal  
Conclusions  
CSH  
Experts’ positions  
990 events  
1
Loans as of December 31, 1990  
Conclusions  
OSH  
Experts’ positions  
Events of 1990  
Loans as of December 31, 1990  
Conclusions  
TWTC  
Events of 1990  
Additional evidence  
Experts’ positions  
Plaintiff’s argument  
Conclusions  
Meadowlark  
Experts’ positions  
Events of 1990  
Loans as of December 31, 1990  
Conclusions  
DT Smith  
Positions in a nutshell  
Plaintiff  
Defendants  
Evidence  
Prior to 1990  
500-05-001686-946  
PAGE: 777  
1
990  
402  
409  
410  
410  
414  
415  
417  
419  
419  
419  
419  
422  
429  
429  
430  
431  
432  
433  
Loan as of December 31,1990  
Experts’ opinions  
Vance and Froese  
Goodman  
Differences between experts  
Conclusions  
Diversion of fees (1988, 1989 and 1990)  
Positions (in a nutshell)  
Plaintiff  
Defendants  
Evidence  
Experts’ evidence  
Vance  
Froese  
Selman  
Levi  
Conclusions  
Information conveyed by Castor’s audited consolidated financial statements of 1988, 1989 and 1990 436  
Highlights (1988)  
Highlights (1989)  
Highlights (1990)  
Results over a five year period  
436  
437  
438  
439  
The 1988, 1989 and 1990 audited financial statements of Castor were materially misstated and misleading  
40  
4
Professional standards  
Evidence  
Conclusions  
440  
442  
446  
Did C&L commit a fault in the professional work that they performed in connection with the audits of Castor for  
1
988, 1989 and 1990?  
Conclusion  
451  
451  
C&L did not conduct their audit of 1988, 1989 and 1990 in accordance with generally accepted auditing  
standards (“GAAS”)  
451  
453  
453  
453  
454  
454  
455  
455  
456  
458  
460  
460  
461  
461  
461  
462  
462  
464  
Lack of independence and of an objective state of mind  
Positions  
Plaintiff’s position  
Defendants’ position  
Court’s conclusion on relevance of allegations relating to independence  
Professional standards and other tools  
Evidence  
Implication in Castor’s affairs  
Role as Castor’s promoter  
Introducing Castor to various business deals or opportunities  
Cafa Financial Corporation  
Ouimet Hubbs  
Orion Maritime Inc.  
Brandywine & Iotech Corporation  
Potential Coat-Hangers (Laurentian Group, JT/Guardian and Sensormatic)  
Chur, Petra and Sloppin  
1
21 Baxter Street  
500-05-001686-946  
PAGE: 778  
CMF  
465  
466  
Expo Overseas  
Investments of Sloppin’s money: Pigments & Chemical, Compagnie de Recyclage de Montréal,  
Perkins Paper and Ideal Metals  
Pigment & Chemical  
467  
467  
468  
468  
469  
470  
473  
475  
Compagnie de Recyclage de Montréal  
Perkins Paper  
Ideal Metals  
Credibility and reliability  
Conclusions  
Inappropriate planning  
Examination performed without due care and by persons that did not have adequate technical training or  
proficiency in auditing  
Lack of supervision and review  
Unqualified opinion without sufficient appropriate audit evidence  
Working papers  
484  
486  
489  
492  
495  
498  
500  
503  
504  
509  
509  
514  
515  
518  
519  
520  
521  
522  
524  
524  
525  
525  
526  
526  
527  
527  
529  
529  
531  
531  
533  
534  
535  
536  
537  
538  
544  
544  
Coopers working papers for Castor’s audit (in general)  
Year-end wrap-up meetings (in general)  
Year-end wrap-up meetings for the 1988, 1989 and 1990 audits (in general)  
Conclusion  
Steps not taken by C&L during their audits  
1
988  
MLV  
MEC  
TSH  
CSH  
OSH  
YH Group  
DT Smith Group  
TWTC  
989  
MLV  
YH Group  
TSH  
CSH  
OSH  
TWTC  
DT Smith  
990  
1
1
MLV  
YH Group  
The nasty nine loans ($40 million)  
TSH  
CSH  
OSH  
MEC  
TWTC  
DT Smith Group  
Information C&L knew or could have known, had they comply with GAAS  
YH group and YH Corporate loans  
500-05-001686-946  
PAGE: 779  
TSH  
CSH  
OSH  
MLV  
MEC  
TWTC  
Meadowlark  
DT Smith  
546  
547  
548  
549  
550  
552  
553  
554  
555  
555  
555  
556  
556  
556  
557  
559  
559  
559  
565  
581  
581  
586  
594  
595  
595  
595  
596  
596  
597  
602  
603  
604  
605  
605  
606  
Fraud is not a defense in the circumstances  
Positions (in a nutshell)  
Defendants  
Plaintiff  
Court’s conclusion  
Fraud: definition  
Fraud and the auditor (1988, 1989 and 1990)  
Experts opinions  
Defendants’ experts  
Selman  
Levi  
Plaintiff’s experts  
Vance  
Froese  
Rosen  
In the circumstances, Fraud is not a defense  
Levi’s assertion as to “Co-conspirators” behaviour  
Ron Smith  
Prychidny  
Lawyers from McLean & Kerr  
The German banks  
Luerssenwerft  
Unionmatex  
Hertel  
Raulino  
Management representation letters  
Year end cash circles  
The negligence issue as it relates to valuation letters  
Positions in a nutshell  
610  
610  
610  
610  
611  
611  
615  
616  
617  
618  
619  
621  
621  
621  
Plaintiff  
Defendants  
Additional evidence  
Valuation letters: why and what for ?  
The trends in performance  
The valuation letter of October 17, 1989  
Between October 17, 1989 and October 22, 1991  
The valuation letter of October 22, 1991  
Valuation and Professional standards  
Overview of experts’ opinions  
Plaintiff’s experts  
John Kingston  
500-05-001686-946  
PAGE: 780  
Kingston’s opinion  
Lowenstein  
622  
625  
625  
628  
628  
629  
629  
629  
Defendants’ expert Selman  
Analysis and conclusions  
Misleading information and overstated valuation  
Purpose and valuation letters  
Nature of opinion  
Negligence  
The negligence issue as it relates to Legal for Life Certificates  
633  
633  
633  
633  
633  
636  
637  
Positions in a nutshell  
Plaintiff  
Defendants  
Additional Evidence  
Experts’opinions  
Conclusions  
Reliance issue  
638  
638  
638  
638  
639  
640  
640  
641  
642  
644  
644  
645  
646  
647  
648  
648  
648  
649  
650  
650  
651  
651  
658  
658  
660  
661  
663  
664  
664  
664  
666  
668  
669  
Positions in a nutshell  
Plaintiff  
Defendants  
Additional evidence  
Who’s who  
Widdrington  
Prikopa  
Taylor  
Fitzsimmons  
Lowenstein  
Jarislowsky  
Morrison  
Lajoie  
Wood  
Widdrington and Stolzenberg’s First Encounter –  
1
1
1
986  
987  
988  
The 1988 deposit of $200,000  
989  
The 1989 investment  
1
1
990-1991  
The 1991 investment  
Board of directors  
Widdrington,Trinity, Stolzenberg and Castor  
Taylor – Fitzsimmons  
Experts’ evidence  
Plaintiff’s experts  
Lowenstein  
Jarislowsky  
Rosen  
Defendants’ experts  
500-05-001686-946  
PAGE: 781  
Morrison  
Lajoie  
Conclusions  
669  
671  
674  
THE LIABILITY ISSUE  
678  
The applicable law  
679  
680  
680  
680  
681  
685  
687  
687  
Positions in a nutshell  
Plaintiff’s position  
Defendants’ position  
Evidence  
Characterization of the question or questions  
Identification of the appropriate conflict of law rules  
Lex loci delicti  
Auditors’ Professional liability and The Quebec laws  
Applicable rules  
688  
688  
695  
Application of rules to facts  
Common law  
699  
699  
700  
700  
700  
700  
702  
702  
707  
709  
709  
710  
712  
719  
719  
Judicial notice  
Expert evidence  
Who’s who  
Campion  
Cherniak  
Experts’ opinions  
Campion  
Cherniak  
Analysis  
First requirement –the duty of care  
First part of the test : relationship of proximity  
Second part of the test : policy considerations  
Second requirement –untrue, inaccurate, or misleading representation  
Third requirement - defendant must have acted negligently in making said misrepresentation  
Fourth requirement - plaintiff must have relied, in a reasonable manner, on said negligent misrepresentation  
19  
7
Fifth requirement- the reliance must have been detrimental to the plaintiff in the sense that damages  
resulted  
719  
THE DAMAGES ISSUE  
721  
Plaintiff’s claim  
721  
Positions in a nutshell  
721  
721  
726  
727  
728  
729  
Plaintiff  
Defendants  
Claim of $1,422,960  
Claim of $1,250,000  
The existence of a claim by the Trustee in bankruptcy  
500-05-001686-946  
PAGE: 782  
No joint and several liability for the C&L partners  
729  
Evidence  
730  
Conclusions  
737  
737  
738  
738  
739  
741  
741  
General conclusions  
Specific conclusions  
Claim of $1,422,960  
Claim of $1,250,000  
The Trustee’s law suit  
Joint and several liability  
COSTS  
743  
Positions in a nutshell  
Plaintiff  
743  
743  
745  
Defendants  
Analysis and Conclusion  
746  
746  
747  
749  
750  
Applicable law  
Defendants’ suggestion: postponement of ruling  
Defendants’ alternate proposition: a prorata ruling  
Conclusion  
500-05-001686-946  
PAGE: 783  
500-05-001686-946  
PAGE: 784  
500-05-001686-946  
PAGE: 785  
500-05-001686-946  
PAGE: 786  
500-05-001686-946  
PAGE: 787  
500-05-001686-946  
PAGE: 788  
500-05-001686-946  
PAGE: 789  
500-05-001686-946  
PAGE: 790  
500-05-001686-946  
PAGE: 791  
500-05-001686-946  
PAGE: 792  
500-05-001686-946  
PAGE: 793  
500-05-001686-946  
PAGE: 794  
500-05-001686-946  
PAGE: 795  
500-05-001686-946  
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500-05-001686-946  
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500-05-001686-946  
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500-05-001686-946  
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500-05-001686-946  
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