publication date: Mar 1, 2012
author/source: Janet Gadeski
Has a charity or a donor ever asked you to consider a means of giving that you found unethical? Take our poll ("Share Your Views" at right).
When donors are enriched by the process of giving, that's a
red flag, says class action lawyer David
of Scarfone Hawkins LLP
And he expects his legal colleagues to know that too. That's why he took on the
Bay Street law firm that backstopped the Banyan
giving program with a favourable opinion on its legality.
The foundation's charitable registration was revoked in
September 2008 after the Canada Revenue
disallowed $208 million in tax receipts and described its donation
arrangements as "a sham."
"One of the primary objectives of class proceedings
legislation is behaviour modification," explained Thompson's colleague Bridget Scott
, speaking on his behalf. "This case and others like it will hopefully
have the effect of causing lawyers and other professionals to be much more
vigilant in providing opinions on such programs in the future."
A precedent for giving
Scott told Hilborn eNEWS
that as far as Scarfone Hawkins is aware, the class action suit against the
Banyan Tree Foundation, its financial service providers and the law firm whose
opinion was published in the program's marketing materials is the first to
include the lawyers among those accountable for participants' losses.
"We do view the Banyan Tree case as an important precedent,"
Just words on a page
In a session during Being
*, Thompson told a packed room of delegates that such
opinions are merely "marketing documents. They're just words on a page." From
the beginning, he confirmed in an email exchange with Hilborn eNEWS
, he and partner Matthew Moloci
believed the foundation's
lawyers knew or ought to have known that promoters would use their legal
opinions in the marketing scheme.
"We felt passionate about the situation and that the legal
landscape needed to change so as to impose accountability in situations such as
this," he explained.
lawyers ran on passion
That fervour supported them through hundreds of hours of
analysis and participant interviews. It fuelled their months-long search for a
representative plaintiff: someone willing to go on record as the "face" of the
class action. And it helped them stand firm when the defendants' much larger
law firm threatened to "squash them like a bug" during initial negotiations.
"We formulated the argument that 'but for' a legal opinion,
programs such as this could never be launched or marketed," Thompson continued.
Tax opinion tapped
rich stream of business
The same law firm that provided the tax opinion also
structured the legal arrangements for the gift program - and according to
Thompson, the legal structure didn't match the assumed arm's-length
arrangements laid out in the tax opinion. He alleged the law firm knew those
assumptions were inaccurate.
An out-of-court settlement with no admission of liability
was reached before he could bring the claim to trial. But he was able to get
the law firm to disclose that it received a "premium fee" based on the number
of participants in the gift scheme. The firm, he continued, "also significantly
assisted the promoters in attempting to address challenges from the CRA."
Thompson remains baffled by the loyalty and stubbornness of
some duped investors. In the beginning, 200 of them refused to cooperate with
him. So convinced were they of the program's validity that they were not even willing
to discuss participating in the suit, let alone becoming the representative
plaintiff. Finally he found an Oakville couple willing to face publicity but
not the representative plaintiff's liability for defendants' legal costs in the
event that he lost the case.
To make the suit feasible, Scarfone Hawkins gave the couple
an indemnity that released them from all liability for the defendants' costs. While
launching the action, they also negotiated with CRA to recognize the cash
portion paid by participants as a charitable donation, and grant capital loss
treatment for the money that had disappeared offshore with the scheme's
The $11 million settlement may sound paltry, Thompson concedes.
It's less than half of the estimated cash invested in the scheme. But with the
primary malefactors declaring bankruptcy, only the lawyers' insurers are able
to contribute to the settlement and the plaintiff's legal costs.
* Being Good@Doing
Good, held in Toronto in February, was organized by Capacity Builders and the
Charity Law Information Program.
For more information on the settlement, http://www.classactionlaw.ca/content/claims/Rochester/Rochester.htm.