Nearly 15 months after the Quebec Court of Appeal griped about the legal war of attrition that has lasted more than a decade in the case against a former accounting giant and its partners over the infamous collapse of Montreal real-estate firm Castor Holdings Inc., the highest court of the province recently dismissed yet another appeal.
The defendants sought to appeal an interlocutory judgment that dismissed their motion to obtain an additional $17-million in payment bonds from the respondents, and declare them to be jointly and severally liable of costs. Judge Lise Côté of the Quebec Court of Appeal upheld the lower court ruling.
Castor Holdings, a Montreal-based unregulated financial intermediary that made its money by raising capital for commercial real estate projects, went bankrupt in July 1992, leaving behind $1.5 billion in debt and scores of angry investors around the world. The dramatic downfall of Castor Holdings took everyone by surprise. In 1990, the last year the privately-held firm produced audited financial statements, Castor showed a loan portfolio of $1.7 billion with net earnings of $31.2 million.
German financier Wolfgang Stolzenberg, Castor Holding’s chairman now believed to be living in Germany, was charged with 39 counts of fraud, totaling $173 million. An international warrant was issued for the arrest of the former Montreal businessman but since there is no extradition treaty between Canada and Germany, Stolzenberg is still at liberty.
After Castor went bankrupt, some 40 lawsuits were filed in 1994 against Coopers & Lybrand and nearly 300 of its partners, alleging that the former accounting giant was negligent in the preparation of financial statements and the evaluation of Castor’s shares. Approximately 20 of the cases have since desisted or been settled.
The suit involving Widdrington, the former chairman of John Labatt Ltd. who sued Coopers for $2.7 million in losses stemming from investments made in Castor Holdings, was designated as the test case. Originally expected to last between six-and-eight months, the Castor case has proven to be Canada’s longest trial, 12 years and counting. More than 3,000 items have been filed as evidence, and more than 1,000 days of hearings have so far been held, with one expert witness – an auditor — testifying over a period of more than three years, “four days a week, three weeks in four, and ten months out of the year.” His cross-examination lasted more than two years.
Procedural wrangling, points out the appellate court, has been a staple of the trial, with “interminable” procedures – such as motions for particulars, motions to recuse attorneys, and motions to compel trustees to put up security costs – that eventually wound their way to the Quebec Court of Appeal and even the Supreme Court of Canada.
On October 2006, the case was struck again by yet another delay when 72-year old Quebec Superior Court Judge Paul Carrière, who presided over the case for eight years, had to retire due to health reasons. Mediation was then proposed by Quebec Superior Court Chief Justice François Rolland, and it failed.
On September 2007, Justice St-Pierre took over the case, and announced during a pre-trial conference that two of her children worked for Stikeman Elliott, one as a lawyer and the other as a student. The Montreal law firm used to represent Castor Holding’s bankruptcy trustee, and one of its partners is counsel to Chrysler Canada’s pension fund, one of the investors suing Coopers.
On September 27, 2007, the defendants launched a motion to recuse the judge from the case, which she rejected, asserting that an informed and reasonable person viewing the matter realistically would not conclude that she would deal with the case unfairly.
In a 21-page unanimous ruling, the Quebec Court of Appeal concurred, pointing out that Judge St-Pierre’s son is now working at Stikeman Elliott’s New York City office while her daughter is expected to be hired only after she completes the exams from the Barreau du Quebec.
“The children of the judge are not part of the litigation,” said the Court of Appeal. “They will not be asked to plead before her, (and) are not personally mandated to represent a party in the litigation. They are also not partners with the lawyers mandated to represent the party, and cannot obtain this status until 2013 in one case and 2016 in the other while the litigation is expected to be completed by 2010 subject to an ordinance issued by Chief Justice Rolland.”
The Quebec Court of Appeal, noting that there has never been a published case in Quebec over similar facts, were informed by a recent ruling issued by the British Columbia Supreme Court (Makowsky v. John Doe  B.C.J. 1809 (B.C.S.C) as well as by jurisprudence in the United States, England and France.
The Court dismissed the applicant’s contention that there is a practice in Quebec in which judges “generally” abstain from hearing cases defended by a law firm that employ their children.
“Perhaps such a practice exists in Quebec, though it is difficult to verify and no evidence was made with this regard, but if such a practice rests on an incomplete examination of pertinent considerations, nothing obliges the courts to conform in all cases,” said the Court of Appeal.
The appeal court also expressed sympathy with the “sincere distress” expressed by the parties suing Coopers. It noted that the Castor Holdings case, with its ramifications, given that nearly a billion dollars is at stake, is a serious matter but it is essentially about the determination of tort by an accounting firm to investors.
“There is not a question here related to fundamental liberties, democratic rights, legal guarantees nor even the general interest of the collectivity,” said the Quebec Court of Appeal. “This serious matter puts into question civil and commercial questions. Certainly, these questions deserve a deep legal examination but it does not deserve judicial resources out of all proportion with the real nature of the problem as has been does devoted to it for more than a decade. It is not exaggerated to say that the Castor Holding affair constitutes an exceptional case in the Quebec’s legal annals.”
Leonard Flanz, a senior litigator with Montreal law firm Fishman Flanz Meland Paquin LLP which is representing more than 20 Canadian and European financial institutions suing Coopers, was pleased with the ruling. Flanz, who begun working on the case in 1993, said the Court of Appeal sent a clear message to the defendants in the Castor Holdings’ case that the “courts in Quebec will not tolerate any dilatory tactics on their part.”
“The plaintiffs have said time and again that they will not be dissuaded by a war of attrition,” said Flanz. “The issue in the trial, and really the only issue, is whether Coopers performed their audit in accordance with generally accepted auditing standards (GAAS) and whether the financial statements truly reflect the financial position of the company. From the perspective of the plaintiffs, if you want blunt language, they feel it is a case of clear audit negligence, that they were screwed by a defective and grossly negligent audit.”
At least three forensic accounting reports were submitted as evidence during the trial, all of whom were unfavorable towards Coopers & Lybrand. A 400-page report penned by FCA Kevin Gunning was particularly critical of Elliott Wightman for his involvement — and his wife’s – in personal investments and financial relationships with Stolzenberg.
These dealings compromised “both the fact and the appearance of his personal independence, and constituted an offence against the rules and ethics of the Quebec Order of Chartered Accountants and the objectivity requirements of the General Standard of GAAS,” wrote Gunning in a 400-page report.
“A surprising number of circumstances appear to have taken place in the years 1984 to 1991 which raise serious questions as to whether Elliott Wightman, in fact or appearance, conducted his personal and professional relationships with this client in a manner which compromised his (and hence his firm’s) independence and objectivity relative to Castor and his controlling shareholders,” added Gunning.
Wightman is no longer a member of the Quebec Order of CAs, having resigned in the 1990s. He was never was the subject of disciplinary measures, according to Order spokesman Cédrick Beauregard.
Yvan Bolduc, lead counsel for Coopers & Lybrand, is disappointed that the Court of Appeal dealt at length with the length of the trial.
“I am disappointed that the issue of the duration of the trial seems to take precedence and that the issues were not necessarily getting all the attention they otherwise would have,” said Bolduc, a partner with the Montreal office of Heenan Blaikie. “We never contended that Judge St-Pierre was biased. We simply said that the facts were such that there was a reasonable apprehension that a reasonable person might think she is. That’s the test.”
He asserts that there was “never an inkling” by the police or the plaintiffs that Wightman ever committed “anything close to fraud.”
Bolduc, like Flanz, says the most important issue the court has to determine is whether the auditors were negligent and at fault, followed by whether the investors actually relied on the audited financial statements to make their investments in Castor. That entails examining the standards GAAP and GAAS as they were applied and practiced more than a decade ago when Coopers & Lybrand conducted the audit of Castor.
“You have to go back to the years in question and see whether GAAP was adhered to or not,” said Bolduc who conceded that there is “no doubt” that there has been “some sort of derailment” in the Castor trial. “If not, was it because of the fraud of the company?”
Flanz has a different take. He says that Coopers & Lybrand had followed GAAS, they would have “uncovered” the fraud that was allegedly committed by Stolzenberg. “There were red flags all over the place, and they – in my opinion – closed their eyes consciously and purposefully and allowed a massive fraud to be perpetrated on the investors, the lenders, the bankers.”
The Castor trial resumed on January 2008. Much of the examinations on discovery, exhibits and transcripts from when Judge Carrière presided over the trial will form part of the court record. Both parties will be allowed once again to examine and cross-examine experts but will only have 120 days to provide proof in the trial, according to a ruling issued by the Chief Justice of Quebec Superior Court.
The trial is being held at a hectic pace, working at a schedule of four days a week, three weeks out of four per month. Judgment is expected to be rendered in the summer of 2010.