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March 14, 2011

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PAGE 2 NEWS march 14, 2011 • Law Times $43K found in envelope in Mazzucco's desk Continued from page 1 jump on board but he did open a new trust account in May 2006 that the LSUC labelled "the rogue trust account." It wasn't until November 2007 that Maz- zucco decided to take part in the scheme, according to the agreed statement of facts. None of the criminal allegations against him have been proven in court. Mazzucco's contact would supply him with the names of lenders and borrowers, often the victims of identity theft, and ask him to register the transfer and charge on the property. Mazzucco refused "because he did not want to put the owner's title at risk," the agreed statement of facts noted. "He had been suff ering from overwhelming debt for many years," according to the document. "Th e respon- dent used funds given to him by clients to pay money owed to other clients, in a kind of Ponzi scheme that dated back to 1990. A couple of clients giving and re- ceiving funds were family members. Th e respondent was anxious not to disappoint or hurt them." Of the $7 million netted by the scheme, Mazzucco distributed $3.3 million to other participants in the fraud and kept $1.5 million for himself as part of an agreement reached with his former client. A further $1.6 million was used to pay off lenders who wanted proof the transaction had closed in order to keep the scheme going undetected. Mazzucco would hold them off with an excuse about why the deal hadn't closed and reimbursed them using money from his rogue trust ac- count, other personal funds, and, on occasion, other clients, according to the agreed statement of facts. In March 2008, the law society stepped in to take over as trustee of his law practice and freeze his bank accounts within two days of receiving complaints about serious losses by those dealing with Mazzucco. Th e LSUC recovered $835,000 from the practice that included money from three bank accounts used by Mazzucco as well as $43,000 stuff ed into a brown paper envelope in his desk. According to a decision by Ontario Superior Court Justice David Brown in January 2009, even Mazzucco's main trust account had problems. Al- though it "appeared to balance," there were "transfers in and out which had not been approved by clients," Brown wrote. Brown ordered the $835,000 to be pooled and shared pro rata among Mazzucco's legal clients and fi nancial institutions left short. According to Th omas, the police and law society received notifi cation about the problems at the same time in March 2008 and remained in contact "as confi dentiality and other requirements permitted." Police have complained the LSUC didn't notify them about Mazzucco's suspension in 2000, but bencher candidate Jerry Udell says the regulator is rightly constrained by solicitor-client confi dentiality in its conduct of investigations. "It's up to the complainants to take those steps, not the law society," he says. "Th ey're not the ones who had something stolen from them. You can lead a horse to water all you want, but we have to respect the fact that the victim may not want the publicity. "I don't think there's an obligation on the law so- ciety when we suspend one of our members to let the world know about it other than to ensure the public is protected. Th e law society's function is to govern itself and ensure that the public interest is paramount." Robert Wadden, another bencher candidate, says the LSUC could improve its public perception by driving home that message. "It does act in the public interest, but I don't know if it's always making that clear. Th ere may be a communication gap between the law society and the public. It's got to be commu- nication as seen from the perspective of the public as opposed to the perspective of lawyers." Directors abrogated responsibility, lawyer says Continued from page 1 more disclosure for shareholders ahead of the vote. Th e regulator was concerned about the involvement of senior management in the negotiation of the deal and the special com- mittee's limited mandate, as well as its failure to consider the fair- ness of the transaction for Class A shareholders who would bear the brunt of the cost. In August, the Ontario Supe- rior Court approved the agree- ment as "fair and reasonable," a decision reinforced by the Divi- sional Court on appeal by sever- al large pension-fund managers who hold Magna shares. Jeremy Fraiberg, a partner at Osler Hoskin & Harcourt LLP who represented Magna in the structural reorganization, told the audience the OSC was right to stay away from the deal. "Th e defi nition of fair value in our securities law is the price that a willing buyer will pay to a willing seller with full infor- mation under no compulsion to act," he said. "Even if we as- sume the process was rotten to the core — which I don't ac- cept — and that there is com- plete, transparent disclosure in the case, then when sharehold- ers say, 'Notwithstanding the problems, we want the deal,' to do anything other than allow it would be paternalistic, in my view." But Anand said the OSC took too much comfort in the fact that the court would need to approve the transaction while ignoring a lengthy history of jurisprudence that gave it a broader power to stop the deal if it wasn't in the public interest because of the precedent it would set. "Th e public interest power re- lates to the preventative jurisdic- tion that the commission must occupy in order to protect mar- ket confi dence and protect the integrity of the capital markets." Just because rational share- holders faced with a restricted choice approved the deal didn't mean it was in the public inter- est, according to Anand. "Secu- rities regulation is not based on the rational investor model," she said. "Th ere is a responsi- bility to intervene where the transaction is abusive." James C. Tory, a partner at Torys LLP who regularly advises corporate boards in disputes, said he was troubled by the court's approval of the Magna deal de- spite the signifi cant concerns. "Th e advice we routinely give corporate boards is that process is critical. If you have a transac- tion emerging from a defective 'Just the prospect of a road- block knocked five per cent off Magna's market valuation,' says Jeremy Fraiberg. process, then that calls into ques- tion the quality of the decision." 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Visit canadalawbook.ca or call 1.800.565.6967 for a 30-day no-risk evaluation Goodmans LLP who represent- ed the CPP Investment Board in its opposition to the deal during the court approval process, said the court focused too much on the result of the vote in deciding whether the deal was fair and reasonable. "Did court approval play a meaningful role here?" he asked. "Th ey looked at the vote in many ways, but if the court is only scrutinizing the vote to make sure there is one, what does it add?" According to Fraiberg, the court's role should be to ensure that the vote was fair and took place with full information. In any case, he said an increase in the value of the shares since the terms of the deal were an- nounced has vindicated the shareholders. Th e market reaction at the time — a jump in share price — showed the deal was seen as one that added value for Magna despite the huge price tag, Fraiberg said. In contrast, when the OSC announced it was looking at intervention, the share price dropped. "Just the prospect of a road- LT0124 www.lawtimesnews.com block knocked fi ve per cent off Magna's market valuation," he noted. "Th ere clearly was a considerable amount of value attributed to the deal."

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