COURT OF APPEAL
    FOR ONTARIO

CITATION: Midland Resources Holding Limited v. Shtaif, 2017
    ONCA 320

DATE: 20170420

DOCKET: C58536 and C58544

Doherty, Brown and Roberts JJ.A.

BETWEEN

Midland Resources Holding Limited, Alex Shnaider
    and Eduard Shyfrin

Plaintiffs (Respondents)

and

Michael Shtaif
, The Estate of Anthony
    Groag,
Gregory Roberts
,
Eugene Bokserman
, Ilya Entin, Irwin Boock
    a.k.a. Irwin Krakowsky and Stanton De Freitas

Defendants (Appellants)

AND BETWEEN

Michael Shtaif,
Gregory Roberts
, Eugene
    Bokserman, and Ilya Entin

Plaintiffs by counterclaim (Appellant by counterclaim)

and

Midland Resources Holding Limited, Alex Shnaider
    and Eduard Shyfrin

Defendants by counterclaim (Respondents by counterclaim)

Kevin L. MacDonald and Jamie M. Sanderson, for the
    appellants Michael Shtaif and Eugene Bokserman

Gregory Roberts, in person

Symon Zucker, Kenneth Prehogan and Kim A. Mullin, for
    the respondents Midland Resources Holding Limited, Alex Shnaider and Eduard
    Shyfrin

Heard: October 24-25, 2016

On appeal from the judgment of Justice Mary A. Sanderson
    of the Superior Court of Justice, dated February 19, 2014, with reasons
    reported at 2014 ONSC 997.

Brown J.A.:

I.

OVERVIEW

[1]

In 2006 and 2007, the parties
    to these appeals were shareholders in two successive corporate ventures to
    develop small oil and gas fields in Russia. During the first half of 2006, they
    carried on the venture through Magellan Energy Limited (Magellan). By June
    2006 it became apparent Magellan was not the legitimate public company some of
    the shareholders had thought it was; in fact it was a sham public corporation
    promoted by two of the defendants, Irwin Boock (a.k.a. Irwin Krakowsky or John
    Howard) and Stanton De Freitas.

[2]

The shareholders thereupon
    re-organized their venture using a new company, Koll Resources Limited
    (Koll), to continue it.

[3]

The shareholders fell into two
    groups. The first consisted of the respondents, Alex Shnaider, Eduard Shyfrin
    and their company, Midland Resources Holding Limited (Midland). They put up
    all the funds for the venture  ultimately some US$50 million. Initially,
    Shnaider and Shyfrin advanced funds through Midland; later they personally
    invested in Koll.

[4]

Two of the appellants, Michael
    Shtaif and Gregory Roberts, formed part of the second group of shareholders.
    Roberts put up no money for the venture; Shtaif, through his operating company,
    Euro Gas Consulting Inc., covered just over $1 million of the ventures operating
    expenses. The third appellant, Eugene Bokserman, was not a shareholder, but an
    investment advisor who was involved in arranging Midlands investment in
    Magellan.

[5]

By mid-2007, each group of
    shareholders had lost trust in the other. Competing lawsuits ensued, in which
    the parties alleged myriad acts of malfeasance against each other. The various
    actions were consolidated into this proceeding.

[6]

Shnaider, Shyfrin, and Midland
    were the plaintiffs in the consolidated action. Their central claim was that
    the defendants, including the appellants, duped them into investing in a
    project they knew was fraudulent from the start, and then induced them to throw
    good money after bad by investing in Koll in an attempt to recoup their losses.

[7]

The defendants counterclaimed
    that the plaintiffs were the real fraudsters because they took control of the
    project after the Koll reorganization had failed, depriving the defendants of
    their interest in what they maintain was a potentially lucrative business.

[8]

Following a 53-day trial, the
    trial judge released a 166-page decision. Shnaider, Shyfrin, and Midland were
    completely successful. The trial judge accepted their evidence that they were
    induced by the defendants deceit to invest millions of dollars in a sham
    corporation. Once that fraud was revealed, the defendants led the plaintiffs to
    believe that they, too, had been duped. The trial judge found that the
    defendants persuaded the plaintiffs to stick with the project on new and
    deliberately misleading terms, causing them further losses.

[9]

In the end, the trial judge
    awarded the respondents the full measure of compensatory damages they sought
    from the appellants: US$1.5 million from Bokserman, US$8,270,000 from Boock and
    US$59,559,512.97 from Shtaif and Roberts. She dismissed the counterclaims of
    Shtaif and Roberts.

[10]

Three of the defendants,
    Shtaif, Bokserman, and Roberts, appeal the judgment against them. Roberts also
    appeals the dismissal of his counterclaim.

[11]

The appellants raise four principal
    objections to the judgment, some of which are raised for the first time on
    appeal.

[12]

First, they submit that the
    respondents claim is precluded by the rule in
Foss v. Harbottle
(1843),
    67 E.R. 189, which holds that individual shareholders (such as Shnaider, Shyfrin,
    and Midland) have no cause of action for wrongs done to a corporation (the sham
    company Magellan and its legitimate successor, Koll).

[13]

Second, they claim a June 21,
    2006 Settlement Agreement precludes the respondents from asserting any claims
    for the period before that date.

[14]

Third, they submit the trial
    judge erred in finding them liable for deceit, unlawful act conspiracy, and
    breach of fiduciary duty. Some of her findings of fact they contend were not
    available to her on the evidence; others were made in respect of claims never
    pleaded.

[15]

Fourth, Roberts appeals the
    dismissal of his counterclaim, arguing the trial judge made numerous factual
    errors.

[16]

For the reasons that follow, I
    would reject the appellants first two arguments based on the rule in
Foss
    v. Harbottle
and the effect of the Settlement Agreement. I see no error in
    the trial judges finding of liability against Bokserman. Nor would I disturb
    her judgment against Shtaif and Roberts for US$8.27 million for their pre-June
    21, 2006 conduct. I would set aside the balance of the judgment against them
    for post-June 21, 2006 conduct, save for their liability for wrongfully
    garnishing certain remnant Magellan accounts. Finally, I would dismiss
    Robertss appeal in respect of his counterclaim.

II.

FACTS RELEVANT TO THESE APPEALS

[17]

In her reasons, the trial
    judge exhaustively reviewed the evidence and made clear factual findings. This summary
    of the evidence will focus only on those facts necessary to decide the appeals.

A.

The events
    of 2005

The genesis of the venture

[18]

Michael Shtaif was an
    accountant and an oil executive with 15 years experience in the oil and gas
    industry. In 2005, he decided to start his own oil production company, which he
    called Euro Gas. He planned to acquire undervalued Russian oil and gas
    companies, consolidate them into one company, and take it public on the TSX. He
    began seeking investors and reviewing potential acquisitions.

[19]

As part of his start-up
    efforts, Shtaif made a commission agreement with Eugene Bokserman. Bokserman
    was an investment advisor who had known Shtaif for many years. Through the
    commission agreement, Bokserman agreed to help Shtaif find investors for his
    new business venture.

October: Shtaif meets Boock/
    Krakowsky/ Howard

[20]

In the fall of 2005, a friend
    of a friend introduced Shtaif via email to a potential investor who said his
    name was John Howard. Howard gave off the appearance of being a wealthy
    Toronto businessman. He held himself out as the principal of a public company
    incorporated in the U.S. called BDW Holdings Ltd (later renamed International/ILGY).

[21]

Unbeknownst to Shtaif at that
    time, John Howard was an alias for Irwin Boock, itself an alias for Irwin
    Krakowsky. Krakowsky had been convicted of securities fraud and market
    manipulation and served time in prison for several frauds, which included
    placing a fraudulent mortgage on his parents home. The U.S. Securities and
    Exchange Commission had imposed a trading ban on him. While in prison, Krakowsky
    married and took his wifes last name, Boock. He also used the aliases David
    Watson and John Sparrow.

[22]

The appellant, Gregory Roberts
     a sometime businessman and lawyer  had known and acted for Boock/Krakowsky/Howard
    for a number of years prior to the events in this proceeding. In 2005, Boock also
    retained Roberts to change his name to Howard, although Roberts testified that
    he did not complete this request, having left the practise of law at the time.

[23]

In a series of emails, Shtaif
    and Howard discussed the possibility of having BDW invest in Shtaifs
    venture. BDW was listed on the Pink Sheets in the U.S., meaning it did not meet
    the reporting requirements to be listed as a public company on a major
    exchange. Howard said that BDW was interested in pursuing oil and gas
    projects.

[24]

The trial judge agreed with
    the respondents that there were red flags that should have led Shtaif to be
    wary of Howard:

·

Within days of their online introduction and before
    they had met in person, Howard suggested Shtaif become the president or executive
    vice-president of BDW, simply run the show, and receive six million free
    trading shares, six million restricted shares and six million options in BDW at
    a penny. Shtaif admitted on cross-examination he had found this suspicious;

·

In their initial email exchanges,
    Howard emailed Shtaif using an email address for David Watson. Even though
    the emails to Shtaif came from Watsons email, it appears that Shtaif knew he
    was dealing with Howard;

·

When Shtaif asked to see BDWs most recent financial
    report, Howard sent him an unaudited balance sheet showing it had just over US$8
    million in assets. Howard didnt provide information about the source of the
    money other than to say was raised by private placement. Shtaif agreed in
    cross-examination that he wanted to know if BDW was legit.

November-Early December: Magellan
    becomes the corporate vehicle for Shtaifs business

[25]

In November 2005, still before
    the two had met in person, Howard offered Magellan as the corporate vehicle for
    Shtaifs oil field venture. Howard represented Magellan was a Delaware public
    company trading on the Pink Sheets. Shtaif agreed, and BDW issued him 12
    million shares.

[26]

The trial judge found Boock,
    as Howard, fraudulently created Magellan in early November 2005 specifically
    for Shtaifs venture. Magellan was not a legitimate public company. The trial
    judge held Boock intended to target Shtaifs investors and use their
    participation in Magellan to lend it credibility. Boock then planned to
    unlawfully issue free trading shares at artificially inflated prices.

[27]

Boocks initial accomplice in
    this scheme was a Toronto businessman, the defendant Stanton De Freitas. Both
    Boock and De Freitas later were convicted by the U.S. Securities and Exchange
    Commission for corporate hijacking - a practice under which a person usurps the
    name and securities ticker number of a defunct or inactive publicly-traded
    corporation for use by a newly-incorporated company - and making unregistered
    offers and sales of the shares of the newly-incorporated companies on the Pink
    Sheets. The Ontario Securities Commission has banned Boock and De Freitas from
    trading in securities, acquiring securities, or acting as directors or officers
    of any issuer.

[28]

Although De Freitas denied
    participating in hijacking Magellan, he admitted that he participated in
    hijacking BDW. He knew that BDW was a sham company and he knew that Boock was falsely
    representing to Shtaif that BDW had the money to invest in Magellan.

[29]

The trial judge concluded
    Boock and De Freitas were liable for unlawful conspiracy during this time
    period. Their conduct violated the prohibitions against fraud and market
    manipulation under the
Securities Act
, R.S.O. 1990, c. S.5, s. 126.1.
    They made promises about Magellan and BDW to induce potential investors that
    they knew would never be fulfilled. Their actions laid the foundation for the
    fraud later perpetrated on the plaintiffs. The trial judge was not prepared to
    conclude that Shtaif was involved in the initial planning of the unlawful
    conspiracy. These findings are not at issue on these appeals.

December: Howard agrees to invest
    $70 million, and the respondents enter the picture

[30]

Boock/Krakowsky/Howard and
    Shtaif met in person for the first time on December 6, 2005. De Freitas was
    present. He introduced Boock to Shtaif as John Howard. De Freitas admitted he
    knew John Howard was an alias, and he suspected Boock was trying to get
    around the U.S. Securities and Exchange Commission trading ban by calling
    himself Howard.

[31]

At the December 6 meeting,
    Howard and De Freitas told Shtaif that BDW would invest $70 million in
    Magellan. Two days later, Howard sent Shtaif a letter of intent stating BDW
    would pay Magellan $8 million on closing.

[32]

Meanwhile, Shtaifs agent,
    Bokserman, set out to land another investor for Shtaifs venture - Midland.

[33]

Midland is incorporated in
    Guernsey, the Channel Islands. It operates worldwide in more than 50 countries,
    with interests in steel, real estate, and shipping, among other businesses. As
    of late 2005, Midland had no experience in the oil and gas industry.

[34]

Midland is jointly owned 50/50
    by its co-founders, Shnaider (who lives in Toronto and is a Canadian citizen)
    and Shyfrin (who lives in the United Kingdom and is a Russian citizen). At the
    time these events unfolded, Shnaider was in his mid-30s and already was one of
    the wealthiest people in Canada, with a net worth of over $1 billion. Shyfrin
    also was very wealthy.

[35]

Bokserman and Shnaider had
    known each other since high school and were good friends. In 2005, Bokersman
    was Shnaiders investment broker; Shnaider occasionally made small investments
    based on Boksermans advice.

[36]

Bokserman arranged a meeting
    of Shnaider, Shtaif and himself to discuss Shtaifs new business. Shtaif
    explained he had identified several undervalued Russian oil and gas properties
    and had a corporate vehicle, Magellan, to acquire them. Shtaif said he was
    looking to raise $120 million and that BDW, a sophisticated Bay Street
    investor, already had committed to invest $70 million. Shnaider said he would
    consider investing $50 million, but would need to consult with his partner
    Shyfrin.

[37]

Shnaider testified Bokserman confirmed
    to Shnaider everything Shtaif had said, including that BDW was a sophisticated
    Bay Street investor and Bokserman had met the BDW investors with Shtaif. Bokserman
    denied doing so. The trial judge accepted Shnaiders testimony. Shnaider testified
    he took comfort in the fact BDW was committed to investing $70 million in
    Magellan, demonstrating that someone else believed in Shtaif.

[38]

Shtaif, Shnaider and Shyfrin
    met together for the first time in Moscow on December 11, 2005. Shtaif told
    them BDW definitely was going to invest $70 million and BDW was a reputable
    international investor backed by financier, John Howard. Shtaif told them
    they had to act fast, as other investors were lining up. He also told them that
    once the undervalued properties were consolidated and taken public, the profits
    would be enormous.

The trial judges findings
    regarding the events of 2005

[39]

The trial judge accepted the
    evidence of Shnaider and Shyfrin that they would not have agreed to invest $50
    million in the proposed venture without BDWs commitment of $70 million. They
    were both of the view that $50 million was insufficient to create even a
    medium-sized oil company. With a total investment of $120 million, they thought
    the venture could succeed.

[40]

The trial judge found Shtaif
    and Bokserman were both liable for fraudulent misrepresentation during this
    time period.

[41]

The trial judge found
    Bokserman knew BDW was not a sophisticated Bay Street investor, as Shtaif had
    represented it to be. As well, he knew investment bankers and banks were wary
    of companies, such as BDW, that traded on the Pink Sheets. She found Bokserman
    intended to deceive the plaintiffs into investing because he wanted to make his
    commission. She assessed Midlands damages against Bokserman at US$1.5 million,
    the amount of the commission he ended up receiving from Magellans funds in April
    2006.

[42]

The trial judge found that
    Shtaif: (i) knew the representation that BDW would invest $70 million in the
    project was false based on the red flags preceding Howards offer; (ii) knew
    that BDW, at most, had around $8 million; (iii) intended to convince Shnaider
    and Shyfrin that BDW was wealthier and better funded than he knew it to be to
    induce them to invest $50 million in Magellan; and (iv) knew the respondents would
    rely on his false misrepresentations.

[43]

On December 20, 2005, Shtaif
    sent Shnaider an engagement letter on Magellan letterhead stating that BDW already
    had transferred $8 million to Magellan. At trial, Shtaif admitted he had
    received no confirmation from Howard that the money had been transferred, and
    he knew by December 27, 2005 at the latest that BDW had not paid anything. On
    that date, Boock, using the name Watson, sent a letter stating that BDW was
    prepared to transfer the first portion of its funding to Magellan, in the
    amount of $2 million.

[44]

The trial judge accepted
    Shnaiders evidence that Midland decided to invest $50 million in Magellan
    based on Shtaifs representation that BDW had already paid $8 million.

[45]

The trial judge found that
    after December 27, 2005, Shtaif could not credibly maintain that Howard had
    duped him about BDW having paid anything to Magellan. Once he knew that
    Magellan had not transferred the promised $8 million, Shtaif had a positive
    obligation to inform the respondents the money had not been transferred, as he
    had earlier represented. The trial judge found that his failure to do so was
    deceitful.

B.

January
    2006: The respondents make their investment, the Magellan board is appointed,
    and the appellant Roberts comes on the scene

[46]

In January 2006, Shnaider
    emailed Shtaif, confirming Midland would invest $50 million in Magellan on two
    conditions: first, it would receive 40% of the Magellan shares; and second,
    $120 million in total had been raised. Again, Shtaif let Shnaider believe that
    BDW already had paid $8 million, with the balance of its $70 million on the
    way.

[47]

The trial judge found Shtaif
    knew Midland did not want to be the only investor because Shnaider and Shyfrin thought
    $50 million would not be sufficient capital to create an oil company. Shtaif knew
    they would be interested only if there was another investor willing to invest
    $70 million; he presented BDW as that investor. The trial judge found Shtaif:
    (i) used Magellans purported public company status and BDWs promises to pay a
    total of $70 million to induce Midland to invest, knowing BDW was not what it
    was representing itself to be; (ii) knew Magellan then would secure $50 million
    in funding regardless of whether BDW paid; and (iii) had no honest belief BDW
    would pay the $70 million.

[48]

On January 9, 2006, before the
    Magellan board met for the first time, Howard transferred 8 million Magellan
    shares to himself and 12 million Magellan shares to Shtaif. The trial judge
    found Shtaif intended to profit from the free-share trading scheme and knew the
    Magellan share price was being manipulated.

[49]

Around the same time, Howard
    called his business friend and former lawyer, Roberts, and asked him to be BDWs
    representative on Magellans board. Howard gave Roberts two million Magellan
    shares out of the eight million he had transferred to himself. Roberts paid
    nothing for those shares. Howard also promised Roberts a US$80,000 annual
    salary from Magellan.

[50]

Howard appointed De Freitas
    to be the other BDW representative on the Magellan board. Howard gave him three
    million of his unauthorized shares in Magellan. Midland appointed Shnaider and
    Shyfrin as its representatives to the board. Magellans executives, Groag
    (Chairman) and Shtaif (CEO and Executive Director), rounded out the board.

[51]

The first Magellan board
    meeting took place on January 20, 2006 in Moscow. The trial judge found that by
    this point Shtaif had joined in Boocks and De Freitass unlawful conspiracy to
    defraud Midland, though with different motives and for different ends. Boock
    and De Freitas targeted Midland in part to lend legitimacy to Magellan and to
    make it easier to pump the value of the shares it was intending to unlawfully
    issue and sell. Shtaif targeted Midland because he wanted its $50 million to
    build his venture, even though he knew Midlands participation was premised on
    BDWs sham commitment of $70 million.

[52]

The trial judge found the
    evidence was insufficient to conclude that Roberts was in on the unlawful
    conspiracy at that point.

C.

February
    2006: Magellan commits to buying SibinTek and Reef, and Roberts breaches his
    fiduciary duties

[53]

Magellans second board
    meeting took place on February 19, 2006 in Moscow. At that meeting, the board
    approved the purchase of two oil fields, SibinTek and Reef. As will be
    described below, the SibinTek acquisition did not close. By reason of Shtaifs
    conduct, Magellan lost much of the money Midland advanced for that transaction.
    The Reef acquisition closed in mid-July. However, Koll eventually sold the Reef
    asset in 2010 at a significant loss.

[54]

This was Robertss first board
    meeting as a director. The trial judge found Roberts failed to inform Shnaider
    and Shyfrin what he knew at the time: (i) Howard was really Boock and was
    using a pseudonym to hide his criminal past; (ii) BDW and Magellan were Pink
    Sheet companies that would not attract Canadian institutional investors; and (iii)
    he had already received two million shares in Magellan from Howard without
    board approval.

[55]

At trial Roberts explained he
    did not disclose any of this information because he believed it was privileged.
    The trial judge rejected this explanation. She found that if the information
    could not be disclosed because it was privileged, given its materiality Roberts
    should not have agreed to join the board. She accepted Shnaiders evidence that
    had Roberts disclosed the information, he would have realized that Magellan was
    a pump and dump stock scheme and would have declined to participate.
[1]

[56]

The trial judge concluded
    Roberts breached his fiduciary duty to Magellan by failing to disclose what he
    knew about Boock and BDW. She held, without elaboration, that while Robertss
    fiduciary duty was to Magellan, on the unusual facts here, his breaches
    caused Midland damages of US$8.27 million  the portion of the US$50 million Midland
    had invested in Magellan before the BDW scam was uncovered.

D.

April
    2006: Midland pays its $50 million

[57]

On March 31, 2006, Groag sent
    an email at Shtaifs direction informing the respondents BDW had met its
    obligation to fund.

[58]

The next day, Roberts emailed
    the respondents, Shtaif, and Groag to advise he had canvassed three
    investment banks, all of whom who were interested in financing Magellan to the
    tune of $200-300 million. He said they would need to develop a business plan as
    a next step. The trial judge found Howard asked Roberts to send this email.
    She found that, contrary to Robertss representations in the April 1 email, he
    had not formally approached any investment bank, and none had expressed interest
    in Magellan.

[59]

The trial judge accepted the respondents
    evidence that Groags March 31 representation that BDW had met its obligation
    to pay was crucial to their decision to advance the $50 million. The trial
    judge found that Boock, De Freitas, and Shtaif engaged in an unlawful
    conspiracy during this period to induce Midland to pay its $50 million
    subscription to Magellan.

[60]

The trial judge further found
    that Boock and Shtaif were liable for deceit for the statements they made to
    the respondents during this time. Throughout March 2006, they were pressing Midland
    to advance its money even though BDW had not yet advanced any funds. They did
    so, in part, by suggesting an unnamed third party was prepared to buy
    Magellans shares at a higher price than Midland. The unnamed third party was
    BDW. Howard and Shtaif knew BDWs higher offer was a bogus one and was
    specifically intended to induce Midland to put up its US$50 million. The trial
    judge also found Howard, De Freitas, and Shtaif were manipulating the share
    price of Magellan to induce Midland to invest.

[61]

Although Roberts and Groag
    were also involved, the trial judge was not satisfied on the evidence that
    they knew exactly what was being planned and therefore could not be said to
    have been part of the unlawful conspiracy at that time. She noted that
    congratulatory emails sent when Midland finally advanced its US$50 million  stating,
    were in business and good job - were passed only amongst Howard, Shtaif,
    and De Freitas.

[62]

The trial judge also was not satisfied
    Roberts and Groag were liable for deceit during this time. Groag did not know BDWs
    offer to pay more than Midland for Magellans shares was false or that BDW had
    not actually met its obligation to fund. While Roberts knew the contents of his
    April 1, 2006 email about the investment banks interest was misleading, the
    trial judge held it did not amount to fraudulent misrepresentation.

E.

April
    5-May 16, 2006: BDW stalls on meeting its commitment, and Shtaif moves forward
    with the SibinTek and Reef acquisitions

[63]

On April 5, 2006, Shnaider
    emailed Shtaif seeking confirmation Midlands $50 million had been deposited
    into Magellans bank account. Shtaif advised it had and there was currently
    over $60 million in the bank. Shtaif admitted at trial he knew Shnaider would
    assume from this representation that BDW had paid $10 million. He knew that was
    false. A few days later, Shtaif travelled from Moscow to Toronto to obtain full
    access to Magellans bank account. He paid Bokserman $1.5 million out of the Magellan
    account in satisfaction of their commission agreement.

[64]

Shtaif also signed a letter of
    intent to purchase Reef Energy, a company that owned an oil field in Perm,
    Russia, and arranged for the purchase of US$12 million in treasury notes to
    acquire SibinTek. The trial judge described Shtaifs goal during this time, at
    para. 1008: Shtaif was busy between April 5 and May 16 trying to divert funds
    from Magellan and making deals on behalf of Magellan that he would later use to
    convince the plaintiffs to stay in the venture.

[65]

On April 28, the board met in
    London, England. All board members except Howard attended. Just before the
    meeting, Groag emailed Howard to tell him Shtaif had advised BDWs $10
    million had been deposited. Groag asked for the balance to be expedited before
    the next board meeting.

[66]

The trial judge found Shtaif
    misled Groag into believing BDW had paid the $10 million when he knew it had
    paid nothing. At the board meeting, Shnaider and Shyfrin demanded to know
    whether BDWs $10 million had been paid. De Freitas assured them it had just
    been transferred. Shnaider, Shyfrin, and Groag believed him. Shtaif knew he was
    lying.

[67]

Also at the April 28 board
    meeting, Shtaif informed the other directors he had signed agreements to
    acquire Reef and SibinTek on Magellans behalf.

[68]

On April 29, Groag gave notice
    to BDW, copied to all of the Magellan board members, that it was required to
    pay the final outstanding balance of US$60 million by June 2, 2006. Groag
    stated that if BDW failed to pay by that time, the board would meet to cancel
    any of BDWs shares that had not been paid in full. Shtaif said nothing,
    leading the respondents to continue to believe BDWs initial $10 million was in
    the bank.

[69]

The trial judge found Shtaif
    was liable for fraudulent misrepresentation during this period because he knew
    Midlands $50 million was the only money in the venture. Had Shtaif told the respondents
    the truth that BDW had paid nothing, the respondents either would have sought
    immediate return of their $50 million or, at the very least, would have
    insisted on tighter controls over payments of the Magellan funds. By the time
    the respondents learned the truth, the trial judge held, millions of dollars of
    Midlands money had already been paid out.

F.

May
    16, 2006: The respondents learn BDW has not paid anything

[70]

From May 15 to 17, 2006, Shtaif
    and Roberts met with investment bankers in Toronto to try to raise funds for an
    eventual Magellan initial public offering (IPO). On May 16, Roberts emailed
    Groag, Shnaider, and Shyfrin reporting that based on these meetings, he thought
    they would be able to raise $300-500 million using tier one and tier two
    investment banks in Canada, but only if we form an international syndicate of
    investment bankers.

[71]

At trial, Roberts admitted he wrote
    this in his email even though: (i) he suspected the Magellan share price was
    being manipulated; (ii) Magellan was a Pink Sheet company with no prospects for
    being moved to a more reputable listing; and (iii) he knew that the investment
    banks would not invest in a Pink Sheet company.

[72]

By this time, BDW had changed
    its corporate name to International/ILGY. In his May 16 email, Roberts wrote
    International will probably not be able to raise their full subscription amount
    in the time we have given themIn my view, it is important to get other strong
    institutions into the deal at this time at a good price.

[73]

At a dinner on the evening of
    May 16, Shtaif finally disclosed to Shnaider that BDW/International had not
    paid anything. Shnaider asked how that was possible, given what De Freitas had
    said at the April 28 board meeting. Shtaif said De Freitas had misled him. He
    also revealed that, somehow, four million free trading shares in Magellan had
    been issued without board knowledge or approval. Shtaif told Shnaider Magellan
    would have to get rid of BDW and find other investors. He told Shnaider that
    would not be a problem; other investors were lined up to replace BDW.

[74]

The following day, Shtaif and
    Roberts retained Allan Beach, a securities lawyer then at Fasken Martineau
    DuMoulin LLP (Faskens), to look into moving Magellan off the Pink Sheets onto
    a higher exchange. Although the trial judge made no finding on this point, she
    noted in her decision the suggestion made by respondents counsel that Shtaif
    and Roberts hired Beach to discover what they already knew  that it would not be
    possible to move Magellan to a higher exchange because it was a sham. Beach
    recommended the parties abandon Magellan and start afresh with a new company.

[75]

The trial judge found Roberts
    and Shtaif were liable for fraudulent misrepresentation during this period.
    Roberts knew Magellan would not be able to raise $300-500 million because it
    would not be possible to move it off the Pink Sheets. Shtaif overestimated the
    value of Reef and SibinTek to induce Midland to stay in the venture. He
    convinced Shnaider they had had a rough start, but going forward everything
    would be better. The trial judge found that Roberts and Shtaif made these
    misrepresentations with the intent to induce the respondents to stay in the
    venture.

G.

Late
    May-June 2006: Shtaif assures Midland all is well with the SibinTek transaction

[76]

The day after he revealed BDW
    never paid Magellan, Shtaif transferred US$12 million out of Magellans account
    into that of his company, Euro Gas. He then converted the money into treasury
    notes he planned to use to buy SibinTek for Magellan.

[77]

At this point the narrative
    takes an extraordinary turn. Instead of putting the US$12 million in treasury
    notes in the name of Euro Gas, Shtaif had the endorsed treasury notes (the
    equivalent of cash) placed in a safety deposit box in the names of Vladimir
    Keloglu, his deputy at Euro Gas, and Tsygankov, the lawyer for Arthur
    Poltoranin who was the principal of a company called Reagent (by a later
    agreement Poltoranin was named as the client of the safety deposit box).
    Reagent purported to own 40% of the shares of the vendor, SibinTek. However, at
    this time Magellans lawyers in the Moscow office of White & Case LLP were still
    conducting due diligence on the proposed transaction and had not confirmed
    Reagents claim of ownership in SibinTek.

[78]

The respondents alleged Shtaif
    conspired with Poltoranin to misappropriate the US$12 million in treasury notes
    by entering into the safety deposit box agreement under which Poltoranin would
    have access to half of the treasury notes (US$6 million) even if Magellan did
    not close the SibinTek acquisition.

[79]

The trial judge rejected
    Shtaifs contention that he was duped by Poltoranin and misled by the lawyers about
    the legal consequences of the safety deposit box agreement. She also rejected
    Shtaifs evidence that he told Shnaider and Shyfrin about the potential problem
    with the treasury notes. On the contrary, the trial judge found Shtaif assured
    them that Reagent had proper title to the SibinTek shares (which had not been
    confirmed) and the White & Case lawyers had advised that it was safe to
    close the SibinTek deal (which they had not).

[80]

The trial judge found that during
    the period leading up to a Magellan board meeting on June 20, 2006, Shtaif
    continued to mislead the respondents, this time by misrepresenting to them that
    the SibinTek deal was on track to close. In fact, Shtaif knew there were
    serious problems with SibinTek. The trial judge held Shtaif lied to the
    plaintiffs to induce them to stay in the venture. She further found that, had
    the plaintiffs known the truth about what was happening with SibinTek at this
    time, they would not have continued with the venture or, if they did continue,
    they would have insisted on more stringent terms.

H.

June 20,
    2006: Final Magellan board meeting and inaugural Koll board meeting

[81]

On June 20, 2006, Shnaider,
    Shyfrin, Groag, Roberts, and Shtaif met and agreed to rescind the Magellan arrangement
    and reorganize their business venture under a legitimate public company, Koll.
    Initially, they agreed ownership would be divided 80/20 between Midland and
    Shtaif, respectively. Shnaider and Shyfrin resigned from the Magellan board to
    avoid any conflict, and the remaining members voted to return to Midland what
    was left of its US$50 million investment in Magellan. The terms of this
    arrangement were memorialized in a June 21, 2006 Settlement Agreement between
    Midland and Magellan.

[82]

Koll then held its inaugural board
    meeting on June 20, 2006.

[83]

The trial judge found Shtaif
    continued to deceive the plaintiffs at the June 20 board meeting by failing to
    disclose the true state of affairs with the SibinTek acquisition. He knew there
    were significant title problems and a real risk the deal would not close. Shtaif
    also knew that should the SibinTek deal did not close, Poltoranin could still
    access some of the treasury notes lodged in the safety deposit box. He made
    these misrepresentations to keep Midlands money in the deal, knowing that the respondents
    would rely on them.

[84]

On July 13, 2006, Koll
    purchased Reef for US$18.5 million using money loaned from Midland.

[85]

By July 15, 2006, the problems
    with the SibinTek deal and the treasury notes came to light. Shyfrin wanted to
    back out of the joint venture, but Shnaider persuaded him to stay.

[86]

Shnaider and Shyfrin, however,
    made their continued participation conditional. They insisted on financial
    control of Koll and that Midlands in-house lawyers be involved in every
    transaction going forward. They also insisted that rather than investing US$50
    million in Koll, they would advance US$50 million as a loan to the company.
    They would also retain 67% of the shares. Shtaif would hold the remaining
    shares to distribute as he saw fit. Shtaif agreed to the new terms, but he
    testified he signed the loan agreement under duress, at a Moscow police
    station with a (literal) gun on the table. The trial judge rejected his
    dramatic account.

I.

The Magellan promissory notes

[87]

The trial judge found that after
    the parties terminated the Magellan arrangement,
Shtaif
and
    Roberts unlawfully conspired to convert to their own use Magellan money left in
    Faskens trust account and a TD bank account. They did so even though they knew
    that any money remaining in Magellans account following the June 20 board
    meeting was to be returned to Midland under the terms of the Settlement
    Agreement.

[88]

Roberts obtained the Magellan
    funds in the following manner. Unbeknownst to the respondents, just before
    resigning as Magellans CEO, Shtaif signed Magellan promissory notes to himself
    (over US$1.28 million) and Roberts (US$44,796) as reimbursement for expenses
    they purportedly incurred while acting for Magellan. Roberts later discovered
    some Magellan funds remained with Faskens ($39,570.66) and in Magellans TD
    bank account ($100,482.02).

[89]

Roberts thereupon commenced
    two actions on the promissory notes in the Ontario Superior Court of Justice.
    He moved for consent judgments on the two promissory notes in a manner that can
    only be described as misleading the court  he arranged for Boock/Krakowsky/Howard,
    now using the alias John Sparrow, to consent to judgment on behalf of Magellan
    when he had no authority to do so. Roberts then garnished the funds in the
    Faskens and TD accounts in satisfaction of the judgments. Neither Roberts nor
    Shtaif told the respondents about the remaining Magellan funds or their efforts
    to recover them for their own purposes.

J.

Events
    after July 15, 2006

[90]

The trial judge found that
    even after the SibinTek debacle had come to light, Shtaif continued to trumpet
    his oil expertise and to insist the respondents rely on that expertise. The
    trial judge accepted Shnaiders evidence that he thought that if Shtaif could
    find oil assets and Koll were taken public, Midland would be able to recoup its
    losses.

[91]

The trial judge found Shtaif
    and Roberts misrepresented the value of the assets Koll owned  for example,
    they represented to the plaintiffs that Reef alone was worth at least US$156
    million, and that post-IPO Koll would be worth at least US$600 million. The
    trial judge found Shtaif and Roberts knew these valuations were false and
    unsupportable. They based their estimates on reserves that had not yet been acquired,
    and knowing the existing reserves fell well below the reserves being assumed by
    the investment bankers for a successful IPO.

[92]

The trial judge found that but
    for the ongoing assurances about the value of Reef, the excitement of the
    investment bankers, and the likely success of the IPO, the respondents would
    not have continued to fund Reef up to the aggregate of US$50 million.

K.

The
    aftermath

[93]

Throughout the second half of
    2006, the parties relationship deteriorated, with Shtaif and Roberts fighting
    Shnaider and Shyfrin for control of Koll.

[94]

The trial judge found that
    after July 15, 2006, Shtaif plotted with Roberts to unwind the nasty
    arrangements regarding the ownership of Koll to which he had freely agreed.
    After November 2006 at the latest, they schemed to exclude Midland and take
    control of Kolls assets. Although this constituted inducing breach of contract
    and unlawful act conspiracy, no compensable damage to the respondents resulted.

[95]

On March 5, 2007, Roberts
    emailed Beach, the Faskens securities lawyer he had retained, a letter setting
    out his and Shtaifs strategy to move the shares of Koaplama (a Koll subsidiary
    that owned Reef) to a company controlled by Shtaif and out of the reach of [Shnaider
    and Shyfrin]. Beach testified, and the trial judge accepted, that he did not
    approve this illegal plan and Roberts and Shtaif did not seek confirmation
    from Beach that transferring Reef to new ownership was legal.

[96]

The respondents immediately
    moved to take control of Reef (Kolls sole asset) by terminating a management
    agreement between Euro Gas and Reef and entering into a new agreement with
    Midland. This allowed the respondents to avoid any injury Shtaifs and
    Robertss conspiracy otherwise would have caused

[97]

The trial judge rejected
    Shtaifs claim that this transfer of Reef was illegal; she held the respondents
    had good reason to be concerned Shtaif and Roberts would try to take Reef away
    from Koll, and they acted in Reefs best interests in effecting the change.

[98]

After several unsuccessful
    attempts, the respondents sold Reef in 2010 for US$5 million. It was
    uncontested that all told, Midland loaned Koll US$50 million, and that its
    losses totalled US$46,105,879.50. In their action against the defendants, the
    plaintiffs claimed a return of that amount, plus interest and punitive damages.
    The trial judge declined to award punitive damages, without giving reasons.

L.

The
    trial judges damages awards

[99]

In the end, the trial judge
    ordered judgment of US$8.27 million against Boock and De Freitas for fraudulent
    misrepresentation and unlawful conspiracy in setting up the fraud in 2005. That
    figure represented the respondents losses up to May 16, 2006, when they realized
    that the corporate vehicle Boock and De Freitas had set up to facilitate the
    joint venture was a sham.

[100]

The trial judge ordered
    judgment of US$1.5 million against Bokserman for fraudulent misrepresentation
    in inducing the respondents to invest in the joint venture based on information
    he knew to be wrong. That figure represented the commission Bokserman earned by
    introducing the respondents to the appellants.

[101]

The trial judge ordered
    judgment of US$59.6 million against Shtaif and Roberts for fraudulent
    misrepresentation and breach of fiduciary duty for continuing to deceive the
    plaintiffs after the initial fraud had come to light. That figure represented
    the respondents total loss on the joint venture. The trial judge awarded these
    funds to Midland. She did not award anything to Shnaider and Shyfrin in their
    personal capacities.

[102]

The trial judge was clear that
    without the further misrepresentations Shtaif and Roberts made to the
    plaintiffs after July 15, 2006 about the value of the assets and the prospects
    for a successful IPO, she would have seriously questioned whether the respondents
    were justified in continuing to pour money into the project in order to
    mitigate their earlier losses. She noted that by that time, Midland had spent a
    further US$18.5 million to purchase Reef. Its total loss by July 15, 2006, was
    US$26.77 million. As I will explain, I am satisfied that the trial judge should
    not have awarded Midland damages for advances it made after the June 21, 2006
    reorganization using Koll as the new corporate vehicle.

[103]

The trial judge went on to
    dismiss the defendants counterclaims.

[104]

Bokserman, Shtaif and Roberts
    now appeal the judgments against them. Roberts appeals the dismissal of his
    counterclaim; Shtaif does not appeal the dismissal of his. Boock was noted in
    default; De Freitas moved shortly before oral argument to have his appeal
    dismissed on consent.

III.

THE ISSUES ON THESE APPEALS

[105]

The appellants raise some
    common issues; others are unique to each appellant. As well, the issues divide
    into two temporal groups: those concerning the appellants conduct pre-dating
    the June 21, 2006 Settlement Agreement, and those based on their conduct
    thereafter. Accordingly, I will deal with the appellants grounds of appeals in
    the following order:

A.

Common issues raised by all
    appellants

i)

Does the rule in
Foss v.
    Harbottle
preclude the respondents from asserting their claims without
    seeking leave to commence a derivative action?

ii)

Does the Settlement Agreement
    preclude the respondents from seeking damages for the appellants pre-June 21,
    2006 conduct?

B.

Boksermans appeal: pre-June
    21, 2006 issues

i)

Did the trial judge err in
    finding Bokersman liable for fraudulent misrepresentation?

C.

Robertss appeal: pre-June 21,
    2006 issues

i)

Did the trial judge err in
    finding Roberts liable for breach of fiduciary duty in respect of his silence about
    material facts at the February 19, 2006 Magellan board meeting?

ii)

Did the trial judge err in
    finding Roberts liable in deceit for statements made in his May 16, 2006 email
    to the Magellan board?

D.

Shtaifs appeal: pre-June 21,
    2006 issues

i)

Did the trial judge err in
    finding Shtaif liable for US$8.27 million for deceit, breach of fiduciary duty,
    and unlawful conduct conspiracy?

E.

Appeals of Shtaif and Roberts:
    post-June 21, 2006 issues

i)

Did the trial judge err in
    finding Shtaif and Roberts liable for deceit in respect of their IPO-related statements
    regarding the value of Koll?

ii)

Did the trial judge err in
    finding Shtaif and Roberts liable for recovering Magellan funds for their own
    use?

F.

Mitigation

i)

Did the trial judge err in
    finding the respondents had not failed to mitigate their damages?

G.

Robertss appeal of the
    dismissal of his counterclaim

i)

Did the trial judge err in
    dismissing Robertss appeal from the dismissal of his counterclaim?

IV.

COMMON ISSUES

A.

Standing:
    The application of the rule in
Foss v. Harbottle

The issue stated

[106]

The appellants argue that if
    they committed any legal wrongs, the entities directly injured by their acts
    were the corporations - Magellan and, subsequently, Koll - not their
    shareholders, the respondents. As a result, the rule in
Foss v. Harbottle
prevents the respondents, as shareholders, from bringing suit to recover
    damages for any wrongs caused to the corporations, Magellan and Koll, absent
    leave to bring a derivative action, which the respondents did not seek:
Hercules
    Management Ltd. v. Ernst & Young
, [1997] 2 S.C.R. 165, at para. 59;
BCE
    Inc. v. 1976 Debentureholders
, 2008 SCC 69, [2008] 3 S.C.R. 560, at para.
    43. The appellants therefore contend the trial judge erred in law by granting any
    judgment in favour of Midland.

[107]

The respondents state the
    appellants are raising the
Foss v. Harbottle
argument for the first time
    on appeal, and the court should decline to entertain it on this basis alone. In
    any event, they argue this submission is misconceived: the respondents did not
    sue as shareholders of Magellan and Koll seeking damages for wrongs done to
    those corporations, but as investors who were duped by the appellants into
    pouring millions of dollars into a sham public company, Magellan, and then
    induced to throw good money after bad by re-investing in Koll in an effort to
    recoup their losses.

[108]

The respondents further submit
    that even if the rule in
Foss v. Harbottle
applies, it only affects their
    fiduciary duty claims against Shtaif and Roberts as those are the only ones which
    could be characterized as derivative. By contrast, the fraudulent
    misrepresentation and unlawful conspiracy claims are personal ones by the respondent
    investors against those who induced them to invest in Magellan and Koll.

Analysis

(1)

The appellants did not specifically plead the claim was barred by the
    rule in
Foss v. Harbottle

[109]

Rule 25.07(4) of the
Rules
    of Civil Procedure
requires a defendant to plead any matter on which he
    intends to rely to defeat the claim of the opposite party and which, if not
    specifically pleaded, "might take the opposite party by surprise or raise
    an issue that has not been raised in the opposite party's pleading." This
    requires a party to plead an affirmative defence, such as a plaintiff's lack of
    standing to sue:
Concord Kitchens GP Inc. v. Eastern Construction Company
    Limited
, 2010 ONSC 2168, at paras. 102-105;
Huber v. Way
, 2014 ONSC
    4426, at paras. 66-68.

[110]

The reason for this pleading
    rule is quite simple. The just determination of a civil proceeding on its
    merits requires a fair adjudicative process. Trial by ambush is not fair.
    Accordingly, trial unfairness may result where a defendant is permitted to rely
    on an unpleaded defence which, if pleaded, might have prompted counsel to employ
    different tactics at trial:
Strong v. Paquet Estate
(2000), 50 O.R. (3d)
    70 (C.A.), leave to appeal refused, [2000] S.C.C.A. No. 532, at para. 37. As
    this court stated in
Hav-A-Kar Leasing
, 2012 ONCA 826, at paras. 69-70:

The failure to raise substantive responses to a plaintiffs
    claims until trial or, worse, until the close of trial, is contrary to the
    spirit and requirements of the
Rules of Civil Procedure
and the goal of
    fair contest that underlies those Rules. Such a failure also undermines the
    important principle that the parties to a civil lawsuit are entitled to have
    their differences resolved on the basis of the issues joined in the pleadings.
    [W]here a defence to a civil action is not pleaded and no pleadings amendment
    is obtained, judges should generally resist the inclination to allow a
    defendant to raise and rely on the unpleaded defence if trial fairness and the
    avoidance of prejudice to the plaintiff are to be achieved.

[111]

The rule is not absolute. This
    court has excused defendants from their failure to raise an affirmative defence
    in the pleadings where the issue was otherwise clearly raised and put in issue
    before trial:
Reliable Life Insurance Company v. M.H. Ingle & Associates
    Insurance Brokers Ltd.
(2002), 59 O.R. (3d) 1 (C.A.), at para. 36. However,
    raising a potentially dispositive issue during closing submissions, after the
    close of evidence, may well prove too late.

[112]

In the present case, Shtaif
    acknowledged in oral argument that he was raising a
Foss v. Harbottle
argument for the first time on appeal. On his part, Roberts appears to have
    raised
Foss v. Harbottle
for the first time at trial in a short passage
in his written closing and then his oral closing
    submissions. However, the appellants did not raise the issue in any of their
    pleadings, or in their opening written or oral statements at trial.

[113]

There are two procedural reasons
    why I would not give effect to the appellants'
Foss v. Harbottle
argument.

[114]

First, the appellants
    tardiness in raising this defence and waiting until the appeal to raise it in
    any substantive way works an unfairness on the respondents:
Kaiman v. Graham
,
    2009 ONCA 77, 45 E.T.R. (3d) 163,

at para. 18.
Had they specifically pleaded a
Foss v.
    Harbottle
defence, the respondents submit they could have sought leave to
    bring a derivative action
nunc pro tunc
. Instead, the respondents only
    had a limited opportunity to reply to Robertss last minute raising of the
    defence.

[115]

Second, the appellants'
    submission is inconsistent with the position they took at trial on their
    counterclaims. Shtaif and Roberts did not view the rule in
Foss v. Harbottle
as precluding their counterclaims against the respondents based on allegations
    the parties were fiduciaries in respect of the Koll portion of their business
    venture. Accordingly, there is merit in the respondents submission that had
    the appellants pleaded a
Foss v. Harbottle
defence, they would have undercut
    the foundation for their own counterclaims.

(2)

The respondents allegations of fraudulent misrepresentation and
    conspiracy are direct, personal claims that are not barred by the rule in
Foss
    v. Harbottle

[116]

In any event, the appellants'
    submission mischaracterizes the real nature of the respondents' claims. The
    respondents do not allege the directors of Magellan or Koll failed to exercise
    the requisite care and diligence in discharging their duties by mismanaging those
    corporations investments in oil fields, thereby causing financial losses that harmed
    the respondents as shareholders. Instead, the respondents allege the individual
    appellants engaged in deceit and conspiracies to induce them to part with their
    money and invest in Magellan and Koll. Those claims are personal in nature,
    seeking damages for tortious harm directly caused to the respondents.

[117]

The rule in
Foss v.
    Harbottle
does not preclude a shareholder from maintaining a claim for harm
    done directly to it:
Meditrust Healthcare Inc. v. Shoppers Drug Mart
(2002), 61 O.R. (3d) 786 (C.A.), at para. 16. As this court stated in
Goldex
    Mines Ltd. v. Revill
(1974), 7 O.R. (2d) 216 (C.A.), at p. 221: Where a
    legal wrong is done to shareholders by directors or other shareholders, the
    injured shareholders suffer a personal wrong, and may seek redress for it in a
    personal action. This principle was re-iterated in
Hercules Managements
    Ltd. v. Ernst & Young
where the Supreme Court stated, at para. 62:

[S]hareholders cannot raise individual claims in respect of a
    wrong done to the corporation...Where, however, a separate and distinct claim
    (say, in tort) can be raised with respect to a wrong done to a shareholder
qua
individual, a personal action may well lie, assuming that all the requisite
    elements of a cause of action can be made out.

[118]

The Quebec Court of Appeal
    recently canvassed the issue of direct versus indirect harm in its decision in
Groupe
    daction dinvestisseurs dans Biosyntech v. Tsang
, 2016 QCCA 1923,
    dismissing an appeal from the motion judges refusal to certify a class action
    brought by shareholders against directors of the corporation for loss in share
    value. In the course of considering whether the damages claimed by the
    shareholders were direct or indirect  the core issue in the case - the Quebec
    Court of Appeal observed, at para. 31:

Another example of direct damage
    suffered by a shareholder resulting from the acts of a director was described
    by the judge as the hypothetical case of the shareholder who purchases his
    shares based on the negligent or fraudulent misrepresentation of directors.
    Such a scenario causes the shareholder to have parted with his money to buy
    worthless shares and thus, suffers harm independent from the company giving
    rise to a good cause of action against directors for damages directly suffered
    by the shareholder.

[119]

The trial judge found on the
    unusual facts of this case that Midland, the shareholder, did suffer a direct
    injury or loss by reason of the appellants conduct. I see no error in those
    findings. The appellants conduct caused Midland to invest monies in Magellan,
    providing that company effectively with its sole source of operational funding.
    Midland claims for the loss of that investment. That distinguishes the present
    case from the typical indirect loss case in which a shareholder seeks to
    recover the loss of share value because the manner of operations of the
    corporation depressed the market price for its stock.

[120]

Consequently, the rule in
Foss
    v. Harbottle
does not apply to the respondents' claims for fraudulent misrepresentation
    and conspiracy. I will deal with their claims for breach of fiduciary duty
    later in these reasons.

B.

The effect
    of the Settlement Agreement on the respondents claims

The issue stated

[121]

The June 21, 2006 Settlement
    Agreement brought the Magellan venture to an end, with the parties
    reconstituting their oil field development project in Koll. The Settlement
    Agreement was between two parties only - Magellan and Midland. It defined
    Midlands earlier purchase of Magellan shares for $50 million as the
    Acquisition, and s. 1 stated: The Acquisition is hereby rescinded. Midland
    returned its share certificate to Magellan. In consideration for the
    certificates return, in s. 2 of the Settlement Agreement Magellan agreed to:
    (i) pay Midland in immediately available funds US$36.328 million; (ii) assign
    to Midland all of its rights in the two Magellan subsidiaries involved in the
    SibinTek and Reef transactions, as well as those transactions purchase
    agreements; and (iii) issue Midland a Magellan secured demand promissory note
    for US$1.67 million, which covered, in part, the commission paid to Bokserman.

[122]

The appellants submit the
    trial judge failed to appreciate the Settlement Agreement prevented the
    respondents from bringing action on any torts committed before June 21, 2006
    because under the agreement Magellan and Midland were deemed to release one
    another as of June 20, 2006.

[123]

As with the first issue, the respondents
    submit the appellants are raising this argument for the first time on appeal
    and the court should not consider it. In any event, they say the argument ignores
    the fact that when the Settlement Agreement was made, the respondents were not
    aware Shtaif was involved in a conspiracy with Boock/Krakowsky/Howard and De
    Freitas, or that Shtaif had deceived them about the status of the SibinTek
    transaction. In those circumstances, they submit, rescission of the Magellan
    agreement cannot absolve the appellants of liability.

Analysis

[124]

The appellants did not plead that
    the Settlement Agreement operated to release all pre-June 21, 2006 claims; nor
    did they raise the defence at trial. On that basis alone, it is not now open to
    them to assert such a defence as a ground for setting aside the judgment.

[125]

In any event, the appellants
    submission cannot succeed. The terms of the Settlement Agreement, and the
    circumstances surrounding its making, do not support the appellants argument that
    the agreement constituted an unequivocal expression by the respondents to
    rescind Midlands share subscription in Magellan by reason of the appellants
    fraud and thereby place all parties
in status quo ante
:
Guarantee Co.
    of North America v. Gordon Capital Corp.
, [1999] 3 S.C.R. 423, at para. 39.

[126]

First, the appellants were not
    parties to the Settlement Agreement; it contains no terms for their benefit.

[127]

Second, Midland gave no
    release of claims in the agreement; by contrast, Magellan released the
    respondents.

[128]

Third, the Settlement
    Agreement contained no provision purporting to release the appellants from
    claims unknown to the respondents at the time the agreement was made. As of
    June 21, 2006, the respondents were not aware of the extent of the risk to the SibinTek
    treasury notes, which ultimately resulted in a loss of just over $6 million of
    the funds invested by Midland. As a result, notwithstanding the assignment of
    Magellans rights in the SibinTek transaction, the respondents suffered a loss caused
    by Shtaifs deceitful conduct.

[129]

Finally, the Magellan
    promissory note lacked any value; it did not result in Midland recouping the
    funds used to pay Bokserman his commission because Magellan never had any
    assets other than the funds invested by Midland.

[130]

I therefore would not give
    effect to this ground of appeal.

V.

BOKSERMANS APPEAL: OTHER GROUNDS CONCERNING PRE-JUNE 21, 2006 ISSUES

[131]

The trial judge held that in
    their late 2005 meeting with Shnaider, Shtaif and Bokserman misrepresented that
    BDW was a sophisticated Bay Street investor committed to investing US$70
    million in Magellan. She held: (i) the statement was false; (ii) Bokserman knew
    the statement was false because, as an investment advisor, he understood
    investment bankers and banks were wary of Pink Sheets companies, such as BDW;
    (iii) he intended the respondents to invest in Magellan based on his
    representation that BDW was what he knew it not to be; (iv) Shnaider relied on
    Boksermans representation in causing Midland to invest in Magellan; and (v)
    Midland suffered damages as a result. The trial judge granted judgment against Bokserman
    in the amount of the $1.5 million commission Magellan paid him using funds
    invested by Midland.

[132]

Bokserman advances three reasons
    why the trial judge erred in holding him liable for fraudulent misrepresentation.

[133]

First, Bokserman submits his
    representation to Shnaider that BDW was a sophisticated Bay Street investor was
    true because it was never proven at trial that the individuals behind BDW were
    not sophisticated Bay Street investors. This submission runs aground on the
    trial judges findings, which were not contested, that the person behind BDW
    Boock/ Krakowsky/Howard  had a criminal record, including convictions for
    fraud, was prohibited from trading by the Ontario Securities Commission, and
    was operating under an alias or changed name.

[134]

Second, Bokserman argues the
    alleged misrepresentations concerned BDWs future intentions to invest US$70
    million in Magellan and, as such, were not actionable statements of fact.

[135]

I disagree. Boksermans representations
    were based on an existing, purported fact: that BDW was made up of sophisticated
    Bay Street investors who were committed to funding the Magellan venture. The
    fact they had not yet advanced funds is irrelevant.

[136]

Finally, Bokserman advances a three-pronged
    argument disputing the respondents suffered damages as a result of his
    misrepresentations. The first prong challenges the trial judges findings that
    without Boksermans assurances, the respondents would not have invested in
    Magellan and Bokserman would not have received his US$1.5 million commission
    a commission paid using Midlands investment.

[137]

While the respondents
    pleading alleged Boksermans representation led Shnaider to express an
    interest in investing, the evidence at trial was that Shnaider relied on
    Boksermans representation in deciding to invest. It was open to the trial
    judge to make the findings of reliance she did on the record before her. I see
    no basis for appellate interference with them. Moreover, the respondents were
    not required to establish that they relied only on that misrepresentation,
    simply that it contributed to their decision and was one of the facts that
    induced them to act:
Fiorillo v. Krispy Kreme Doughnuts, Inc.
(2009), 98
    O.R. (3d) 103 (S.C.), at para. 91.

[138]

The second prong contends
    Midland cannot recover damages because it was Magellan that paid Boksermans
    commission. Of course, the only funds Magellan had, came from Midland. This argument
    essentially is a variant of the
Foss v. Harbottle
submission, which I
    have rejected.

[139]

The final prong argues Midland
    suffered no damage because under the Settlement Agreement it received a
    Magellan promissory note that covered, in part, the amount of the commission
    paid to Bokserman. Apart from the financial reality that the note lacked any
    value, the Settlement Agreement did not contain any release of claims by
    Midland against Bokserman.

[140]

For these reasons, I would dismiss
    Boksermans appeal.

VI.

ROBERTS: OTHER GROUNDS OF APPEAL CONCERNING PRE-JUNE 21, 2006 EVENTS

[141]

The trial judge held Roberts
    breached his fiduciary duty to Magellan by not disclosing material information
    at the February 19, 2006 board meeting (the true identity of Howard and his criminal
    record) and committed a deceit in a May 16, 2006 email (reporting Magellan
    would be able to raise $300-500 million). The trial judge found these breaches caused
    damages to Midland by June 20, 2006 of $8.27 million. Roberts submits the trial
    judge erred in making both findings.

[142]

In this section, I
    deal with the trial judges finding of breach of fiduciary duty. I conclude the
    trial judge erred in finding Midland could recover the loss as the beneficiary
    of a fiduciary duty. Nevertheless, her liability finding of $8.27 million must
    be upheld, as it is properly characterized as liability for fraudulent
    misrepresentation.
I will consider
    Robertss submissions about the trial judges May 16, 2006 email deceit finding
    in Part VIII below, together with similar submissions made by Shtaif.

A.

Breach of
    fiduciary duty: The issue stated

[143]

All Magellan directors,
    including Shnaider and Shyfrin, attended the companys February 19, 2006 board
    meeting in Moscow (the February Board meeting). It was Robertss first
    directors meeting. The trial judge held Roberts breached his fiduciary duty as
    a director by failing to disclose to the Board material information, including that
    Howard really was Boock/Krakowsky, who had a criminal record for fraud and
    was using a changed name or alias. The trial judge accepted the evidence of
    Shnaider and Shyfrin that had Roberts disclosed such information to the Board, they
    would not have proceeded with Magellan.

[144]

The trial judge tersely explained
    the basis of her finding of liability at para. 1178, stating:

I have found Roberts breached
    his fiduciary duty to disclose material information to the Magellan Board on
    February 19, 2006 that Howard was Boock and that he had a criminal record. Had
    Roberts done so, the rescission of Midland's contract would have been
    unnecessary and Midland would not have suffered a direct resulting loss of
    $8,270,000 net. While Roberts's and Shtaif's and De Freitas's fiduciary duty
    was to Magellan, on the unusual facts here their breaches of their duties to
    Magellan caused Midlands damages of $8,270,000.

[145]

Roberts concedes he owed a fiduciary
    duty to Magellan, but submits the trial judge erred by allowing Midland to
    recover damages for his breach of it. He submits that as a Magellan director,
    he owed a fiduciary duty only to the corporation, not to its shareholders,
    following
BCE
, at para. 66. Since the respondents did not have a direct
    cause of action against him as the beneficiaries of a fiduciary duty, and since
    they did not bring a derivative action in respect of any damages caused by his
    breach to Magellan, Roberts contends the trial judge erred in granting Midland
    damages for his failure to disclose material facts at the February Board
    meeting.

[146]

The respondents reply that Robertss
    conduct caused Midland a direct, personal harm as a shareholder because it lost
    its investment. The trial judge therefore was entitled to find Roberts liable
    for that harm.

B.

Analysis

Robertss conduct at the February
    Board meeting

[147]

The analysis must start with
    an examination of Robertss conduct at the February Board meeting. Was he under
    a duty to disclose what he knew about Howards criminal background and name
    change? Unquestionably he was.

[148]

Directors must serve the
    corporation selflessly, honestly, loyally, and in good faith; they must avoid
    abusing their position to gain personal benefit:
Peoples Department Stores
    Inc. (Trustee of) v. Wise
, 2004 SCC 68, [2004] 3 S.C.R. 461, at para. 35.
    These fiduciary duties flow from the trust and confidence shareholders  repose
    in the directors to manage the corporations assets, including those
    transferred to the corporation by the shareholders:
Peoples
, at paras.
    34-35.

[149]

As a result, a director owes a
    corporation a fiduciary duty to act honestly, which includes a duty to disclose
    material information: see, generally, Kevin P. McGuinness
, Canadian Business
    Corporations Law
,

2d ed. (Markham, Ontario: LexisNexis Canada Inc.,
    2007), at
§
11.40;
484887 Alberta Inc. v. Faraci
, 2002 ABQB 406, 311 A.R. 355, at para. 28, citing
Jackson v. Trimac Limited
, 1994 ABCA 199, 20 Alta. L.R. (3d) 117,

at
    p. 5.

[150]

Roberts submits the
    information he possessed about Howards criminal background and his change of
    name were not material because, by the time of the February Board meeting, Midland
    already had signed the agreement to subscribe for Magellan shares. That argument
    is a non-starter. First, such information struck at the root of the legitimacy
    of Magellan as a public company, and Roberts was required to disclose it
    regardless of whether the respondents had made some, all, or none of their
    investment in Magellan. The trial judge accepted Shnaiders evidence that had
    Roberts disclosed this information, he would have realized that this was a
    pump and dump scheme and would have declined to further participate in
    Magellan. There is no basis upon which to interfere with that finding.

[151]

Moreover, while Midland signed
    the share subscription agreement in January 2006, it did not advance its $50
    million to Magellan until early April 2006, well after the February Board
    meeting.

[152]

Given what Roberts knew about
    Howards criminal past, he had two options. First, as the trial judge pointed
    out, if he believed the information was privileged and non-disclosable because
    he had obtained it during the course of doing prior legal work for
    Boock/Krakowsky/Howard, given its materiality, he should not have agreed to
    join the Board. From the trial judges findings, it is clear why Roberts did
    not take that option. He had much to gain personally by Midlands injection of
    funds into Magellan  the appreciation in value of his two million Magellan
    shares and a US$80,000 annual directors fee.

[153]

Robertss second option was to
    open his mouth and tell his fellow directors about Howards real identity and
    criminal past. That he did not do; no doubt for the same reason of not wanting
    to jeopardize any future personal gain.

[154]

So, Roberts kept silent. In so
    doing, he egregiously breached his duty as a director to make timely disclosure
    of material information to Magellans Board.

Midland cannot recover against
    Roberts on the basis of breach of fiduciary duty

[155]

Roberts contends his silence
    at the February, 2006 Board meeting attracts no legal liability to Midland
    because his directors duty was owed only to Magellan and, as a result, Midland
    cannot recover any damages resulting from it.

[156]

Directors owe their fiduciary
    obligation to the corporation:
Peoples
, at para. 43;
BCE
, at
    para. 66. And, in
BCE
, the Supreme Court of Canada noted that
    [n]ormally only the beneficiary of a fiduciary duty can enforce the duty:
    para. 41. The court acknowledged this could work a harsh result because the
    directors who control the corporation are unlikely to bring an action against
    themselves for breach of their own fiduciary duty: para. 41. However, in light
    of the availability of several other remedies to shareholders  such as the
    oppression remedy, a derivative action, or an action based on a directors duty
    of care  the Supreme Court has resisted characterizing corporate stakeholders
    as the beneficiaries of directors statutory fiduciary duties:
Peoples
,
    at para. 53;
BCE
, at paras. 42-45.

[157]

That said, a director may owe
    an
ad hoc
fiduciary duty to a shareholder, especially in situations
    involving a family or other close special relationships of trust and dependency
    between the claimant and the defendant director, in which the director was
    seeking to take advantage of that relationship for personal gain or profit:
    Kevin McGuinness,
Canadian Business Corporations Law
,
Second Edition,

at §11.194;
Harris v. Leikin Group Inc.
, 2013 ONSC 1525, at para.
    401-2; affirmed 2014 ONCA 479. However, although the respondents pleaded the
    existence of an
ad hoc
fiduciary duty owed by Roberts to Shnaider and
    Shyfrin, the trial judge made no factual findings that such a duty arose in the
    circumstances.

[158]

Thus, on the current state of
    the law, the trial judges implicit holding that Midland, as a shareholder,
    enjoyed a cause of action against Roberts for his breach of fiduciary duty to
    Magellan is not sustainable.

Midland can recover against Roberts
    for fraudulent misrepresentation

[159]

Although the trial judge erred
    in concluding Midland could recover its loss as the beneficiary of a fiduciary
    duty Roberts owed to Magellan, I see no error in the trial judges finding that
    Midland suffered a loss of US$8.27 million as a direct result of Robertss
    failure to disclose material information at the Magellan February Board
    meeting.

[160]

As discussed earlier in this
    judgment, the rule in
Foss v. Harbottle
was not an obstacle to the respondents
    claims. Midland therefore could sue to recover its direct loss.

[161]

The trial judges error lay
    not in attaching liability to Roberts for his silence about Howards
    background at the February Board meeting, but in finding liability on the basis
    of breach of fiduciary duty, instead of on the alternative basis advanced by
    the respondents in their closing submission  fraudulent misrepresentation.

[162]

Fraudulent misrepresentation is
    established where there are the following five elements: (i) a false
    representation of fact by the defendant to the plaintiff; (ii) knowledge the
    representation was false, absence of belief in its truth, or recklessness as to
    its truth; (iii) an intention the plaintiff act in reliance on the
    representation; (iv) the plaintiff acts on the representation; and (v) the
    plaintiff suffers a loss in doing so:
Amertek Inc. v. Canadian Commercial
    Corp.
(2005), 76 O.R. (3d) 241 (C.A.), at para. 63, leave to appeal
    refused, [2005] S.C.C.A. No. 439.

[163]

A misrepresentation can
    involve not only an overt statement of fact, but also certain kinds of silence:
    the half-truth or representation that is practically false, not because of what
    is said, but because of what is left unsaid; or where the circumstances raise a
    duty on the representor to state certain matters, if they exist, and where the
    representee is entitled, as against the representor, to infer their
    non-existence from the representors silence as to them: Robert van Kessel
    & Paul Rand,
The Law of Fraud in Canada
(Toronto: LexisNexis Canada
    Inc., 2013), at
§
2.69 and 2.72.

[164]

The significance of silence
    always falls to be considered in the context in which it occurs:
Demagogue
    Pty. Ltd. v. Ramensky
(1992), 39 F.C.R. 31 (Austral. F.C.), at p. 32. As explained
    by Professor Waddams: Almost always something is said to induce the
    transaction and it is open to the court to hold that the concealment of the
    material facts can, when taken with general statements, true in themselves but
    incomplete, turn those statements into misrepresentations: S.M. Waddams,
The
    Law of Contracts
,

6th ed. (Toronto: Canada Law Book Inc., 2010), at
    para. 439.

[165]

In the present case, the trial
    judge relied, in part, on the Minutes of the February Board meeting to find
    that Roberts did not disclose Howards real identity and conviction for fraud
    or that Roberts had acted for Howard in the past.

[166]

Those Minutes reveal two
    critical facts about the context in which the Boards discussion took place.
    First, Roberts was identified as a director representing the interests of BDW
    Holdings Ltd., the touted senior investor in Magellan associated with Howard.

[167]

Second, the Minutes show the
    Board agreed that the initial subscribers for Magellan shares  the most
    significant of which were BDW and Midland  were to pay for their subscriptions
    within 21 days. Notwithstanding that Roberts concurred in that Board decision,
    as his signature to the Minutes attests, he remained silent about the true
    identity and criminal past of the principal behind the largest subscriber, BDW,
    the company whose interests other Magellan directors understood he was
    representing. Robertss silence on those material facts lent an air of
    legitimacy to BDW as the senior subscriber for Magellan shares that BDW did not
    possess because of Howards involvement in it.

[168]

Further, the discussion at the
    February Board meeting, as recorded in the Minutes, made it clear to Roberts
    that Midland was being asked to pay for its Magellan shares within 21 days.
    Roberts therefore knew that his silence about the true identity and criminal past
    of BDWs principal would result in Midland investing funds in Magellan in
    ignorance of BDWs real circumstances.

[169]

In short, the trial judges
    findings disclose Roberts knew the information he possessed about Howards
    criminal past and name change was material, and he intended the respondents to
    rely on the favourable impression about BDW created by his silence. The
    respondents acted to their detriment in relying on Robertss non-disclosure and
    the trial judge accepted that had this information been disclosed to the
    Magellan Board, the Board would not have proceeded with Magellan. Midland
    suffered a direct loss as a result.

[170]

But, the respondents did not
    specifically plead that Robertss silence amounted to a fraudulent
    misrepresentation. Does such an omission require this court to set aside that
    part of the judgment imposing US$8.27 million liability on Roberts to Midland
    for his pre-June 21, 2006 conduct? In my view, it does not.

[171]

Yet, later in these reasons I
    conclude the respondents failure to plead fraudulent misrepresentation
    justifies setting aside most of that portion of the judgment in respect of the
    post-June 21, 2006 conduct of Roberts and Shtaif. Is it inconsistent to uphold
    part of the judgment on a basis not specifically pleaded, but set aside another
    part by reason of want of a proper pleading? I think not; the circumstances of the
    two situations differ materially.

[172]

Unlike the circumstances in
    respect of that part of the judgment based on the post-June 21, 2006
    IPO-related statements of Roberts and Shtaif, the respondents clearly pleaded
    Roberts committed a wrongful act by not disclosing material information about
    Howard at the February Board meeting and Midland suffered a loss as a result.
    The respondents also squarely put in issue Robertss wrongful conduct at the February
    Board meeting and the relief they sought for it during the trial, directly
    cross-examining Roberts on the point. In their closing submission, they also
    advanced fraudulent misrepresentation by silence as an alternative basis for
    finding Roberts liable in respect of the February Board meeting. Accordingly, I
    see no unfairness to Roberts by upholding this part of the judgment - throughout
    the trial he knew the case he had to meet in respect of his conduct at the February
    Board meeting.

[173]

For the reasons set out above,
    I see no error in the trial judge granting judgment against Roberts for US$8.27
    million on the unusual facts here.

[174]

Although that is sufficient to
    dismiss Robertss appeal of that portion of the judgment awarding damages of
    US$8.27 million for Midlands pre-June 21, 2006 losses, I intend to deal with
    Robertss additional ground of appeal that the trial judge erred in finding him
    liable in deceit for statements made in a May 16, 2006 email. However, since that
    ground of appeal raises issues similar to those concerning her findings of
    deceit against both Shtaif and Roberts for post-June 21, 2006 statements, I
    will deal with all the statements together in Part VIII below.

VII.

SHTAIFS APPEAL: OTHER GROUNDS CONCERNING PRE-JUNE 21, 2006 CONDUCT

Liability for deceit

[175]

The trial judge found Shtaif
    liable to Midland for deceit and unlawful conspiracy in respect of conduct that
    took place before June 21, 2006, which caused Midland damages of $8.27 million.
    The trial judge calculated the $8.27 million by deducting the amount of the
    SibinTek treasury notes recovered by Midland ($5.4 million), from the aggregate
    of $13.67 million in Midland funds that Magellan used to fund the failed
    SibinTek transaction, together with the commission paid to Bokserman.

[176]

Some of the pre-June 21, 2006
    fraudulent misrepresentations for which the trial judge found Shtaif liable
    were: (i) stating BDW was a sophisticated Bay Street investor committed to
    investing US$70 million in the venture; (ii) as of December 20, 2005 BDW
    already had transferred US$8 million to Magellan; (iii) advising in late March
    2006 that Magellan had received a higher third party offer for its shares; (iv)
    stating Magellan had received US$10 million from BDW by April 5, 2006; (v)
    continuing that deceit through the period until May 16, 2006; and (vi)
    continuing misrepresentations between May 23 and June 20, 2006 that all was
    well with the SibinTek acquisition.

[177]

Although Shtaif broadly
    submits the trial judge erred in finding him liable, he does not point to any
    palpable and overriding error of fact in the trial judges deceit findings. In
    fact, at the hearing of the appeal, Shtaifs counsel stated he was not
    challenging the trial judges findings of fact. In any event, the trial judges
    reasons analyzed each of those allegations of deceit, and ample evidence
    supported her findings of liability.

[178]

That conclusion is sufficient
    to dismiss Shtaifs appeal of that portion of the judgment awarding damages against
    him of US$8.27 million for Midlands pre-June 21, 2006 losses.

[179]

Shtaif, however, raises three additional
    grounds of appeal in respect of other findings of liability for his pre-June
    21, 2006 conduct.

[180]

First, he submits the trial
    judge erred in finding him liable in deceit for a May  2006 statement about the
    worth of Reef. As with Roberts, that ground of appeal raises issues similar to
    those concerning the trial judges findings of deceit against both Shtaif and
    Roberts for post-June 21, 2006 statements. I will deal with all the statements
    together in Part VIII of these reasons.

[181]

Shtaif also argues the trial
    judge erred in finding him liable for (i) breach of fiduciary duty and (ii)
    unlawful conduct conspiracy.

Liability for breach of
    fiduciary duty

[182]

The trial judge found Shtaif
    breached his fiduciary duty as a director to Magellan by failing to disclose to
    the companys Board that (i) he owned 12 million BDW shares, (ii) Magellans
    share price was being manipulated, and (iii) the risks to the SibinTek treasury
    notes. Her findings of liability based on Shtaifs breaches of fiduciary duty to
    Magellan suffer from the same legal error as that made in regard to Roberts
    breach of fiduciary duty  Midland was not the beneficiary of the duty and
    could not recover for its breach. However, the errors have no effect on the
    judgment of U.S. $8.27 million against Shtaif for his pre-June 21, 2006 conduct
    given the trial judges findings against him of deceit, described in para. 176
    above.

Liability for unlawful conspiracy

[183]

The trial judge also found
    Shtaif liable to the respondents for damages in the amount of U.S. $8.27
    million on the basis of his participation in an unlawful conduct conspiracy.
    Shtaif challenges that conclusion, not on the ground that the trial judge erred
    in her findings of fact, but on the basis that the respondents failed to plead
    unlawful conduct conspiracy with any precision or particularity.

[184]

For several reasons, I am not
    persuaded by Shtaifs submission. First, the respondents Amended Fresh as
    Amended Statement of Claim contained lengthy and particularized allegations
    describing the unlawful conduct conspiracy, including Shtaifs role in it and
    the unlawful conduct  deceit and violations of s. 126.1 of the
Securities
    Act
, R.S.O. 1990, c. S.5. Second, in his pleading Shtaif did not challenge
    the adequacy of the respondents pleading of conspiracy; instead, he pleaded
    over and denied the allegations. Finally, Shtaif fully responded to the
    respondents conspiracy allegations at trial.

Summary

[185]

By way of summary, the trial
    judges findings on the deceits described in para. 176 above firmly supported
    granting judgment against Shtaif in the amount of US$8.27 million.

VIII.

SHTAIF AND ROBERTS: GROUNDS OF APPEAL
    CONCERNING POST-JUNE 21, 2006 EVENTS

A.

Fraudulent
    misrepresentations

The issue stated

[186]

The trial judge found both
    Shtaif and Roberts liable for deceit in respect of statements made about the
    possible future value of Magellan, and then Koll, upon the completion of an
    IPO. The strategic business plan of Magellan, and then Koll, contemplated the
    acquisition of several oil and gas fields followed by the issuance of an IPO.
    Roberts, and to a lesser degree Shtaif, worked to gauge the interest of the
    (largely) Canadian investment banking community in such an IPO. They reported
    back to members of the boards, including Shnaider and Shyfrin, about the
    results of their discussions with investment bankers.

[187]

The trial judge held that
    statements made by Shtaif and Roberts about the results of those discussions
    and the value of the Reef oil field (the IPO-related Statements) constituted deceits.

[188]

First, she used statements
    contained in Robertss May 16, 2006 email to Magellan directors as an
    additional basis to find him liable for $8.27 million in damages for Midlands
    pre-June 21, 2006 losses. Specifically, she found, at para. 1030, statements in
    that email amounted to deceit:

Roberts wrote Ex. 18/Tab 120 to
    Shnaider, Shyfrin, Shtaif, De Freitas, and Groag, opining that as a result of
    his meetings with the investment bankers, Magellan would have no difficulty
    raising $300-$500 million from tier one and two investment banks.

[189]

Second, the trial judge found
    that sometime in May 2006 Shtaif represented to Shyfrin that Reef was worth
    $250 million, although she does not identify the specific occasion on which Shtaif
    made such a statement. She held that statement induced the respondents in
    mid-May 2006 to continue in the Magellan venture.

[190]

The trial judge then relied on
    further statements made by Shtaif and Roberts in September 2006 and in February
    16 and 18, 2007 documents as the basis for attaching liability to them for the
    balance of the judgment of $46,105,879.43: at paras. 1180 and 1186.

[191]

In respect of the September
    2006 discussions with the investment bankers, the trial judge did not identify
    specific statements made by Shtaif or Roberts. Instead, she referred to
    comments contained in a presentation prepared by one of the investment bankers,
    CIBC, which subsequently were summarized in the minutes of the Koll September
    30, 2006 board meeting.

[192]

The trial judge found liability
    in deceit for statements in certain documents prepared by Roberts and Shtaif in
    mid-February 2007, even though by that time Midland had advanced all funds used
    to acquire oil properties.

[193]

Roberts circulated a February
    16, 2007 memo to the Koll board with his recommendations for a fair
    resolution of the shareholders current impasse. The memo stated, in part,
    that he had prepared a valuation based on an
assumption

that

[Koll] will have a net worth of $600,000,000 at the IPO and we will raise
    $200,000,000 at that timeObviously,
this analysis
    is imprecise
, but it is demonstrative
    none-the-less of the issues we face (emphasis added). Although the trial judge
    did not specifically refer to this memo in the extract from her reasons set out
    above, it is the only memo of Roberts after the end of January 2007 dealing
    with Kolls ability to raise financing.

[194]

On his part, in mid-February
    Shtaif circulated some estimates of Reefs value, drawing on information
    contained in the Miller and Lents Report, which Shnaider had received.

[195]

Shtaif and Roberts submit the
    trial judge erred in finding them liable in deceit for the IPO-related
    Statements because the respondents never pleaded or argued at trial that such
    statements amounted to fraudulent misrepresentations.

[196]

The respondents acknowledge
    that the trial judge may have partly based her liability on factual findings
    that were not pled. However, in their factum they submit:

The findings which the Appellants challenge arose directly from
    the pleadings, from the evidence led at trial (in many cases by the
    Appellants), and from the parties closing submissions. The Appellants had
    adequate notice of the theories of liability that grounded the trial judges
    decision and fully engaged with those theories. They knew the case they had to
    meet and there was no unfairness.

Analysis

[197]

I would accept the submissions
    of Shtaif and Roberts that the trial judge erred in finding liability against
    them for the IPO-related Statements, for several reasons.

[198]

First, precision and
    particularity are necessary when pleading fraud. Rule 25.06(8) of the
Rules
    of Civil Procedure
requires any pleading of fraud or misrepresentation to contain
    full particulars. In
Hamilton v. 1214125 Ontario Ltd.
, 2009 ONCA 684, 84
    R.P.R. (4th) 25,

this court identified, at para. 35, the necessary
    elements for a plea of deceit:

The pleading, even of innocent misrepresentation, must set out
    with careful particularity the elements of the misrepresentation relied upon,
    that is:

1.       the alleged misrepresentation itself,

2.       when,
    where, how, by whom and to whom it was made,

3.       its falsity,

4.       the inducement,

5.       the
    intention that the plaintiff should rely upon it,

6.       the
    alteration by the plaintiff of his or her position relying on the
    misrepresentation,

7.       the
    resulting loss or damage to the plaintiff.

Of course, if deceit is alleged, then there must also be an
    allegation that the defendant knew of the falsity of his statement. Each of
    the defendants must know the case that it has to meet.

[199]

The respondents did not plead any
    of the IPO-related Statements as part of their narrative of events, let alone
    as conduct supporting allegations of fraudulent misrepresentation.

[200]

Second, the evidence led at
    trial cannot be read as clearly disclosing to Shtaif and Roberts that the
    respondents were alleging the IPO-related Statements constituted deceits:

·

In their evidence at trial,
    neither Shnaider nor Shyfrin identified any of those statements as ones that
    misled them;

·

Shnaiders and Shtaifs testimony
    suggests they did not believe Robertss statement in his May 16, 2006 email
    that they could raise $300 to $500 million on an IPO. Shnaider stated: I
    didnt believe its going to be such a large amount of money, but I believed
    that we will be able to raise probably a hundred million, 150 million as a
    first round. Shyfrin testified he did not pay much attention to the email
    because company which has no assets, no assets at that time, just a pipeline
    but no real assets, how it go public?

·

There was evidence that at least one
    of the investment bankers Roberts met in May 2006, Mr. Mark Maybank of Canaccord,
    was excited about the venture. Maybank testified that his colleagues left their
    meeting with Shtaif and Roberts with a level of enthusiasm and a level of
    excitement. We liked the story, we liked the people that were involved, and we
    were keen to try to secure the business for Canaccord;

·

Shnaider testified he attended the
    September 2006 meetings with investment bankers on which Roberts later reported
    to the Koll board, and described the meetings as basically a beauty parade
    that was prepared for us by the investment bankers. They were basically
    introducing themselves. Shnaider stated:

But you know, we understood that investment bankers, in order
    for them to permit anything, they have to do due diligence on the company, they
    have to do due diligence on assets of the company.
And it
    was way too premature at that time to do anything
. [Emphasis added];

·

Maybank confirmed that by the time
    of the September 2006 meetings, Canaccord was extremely keen on acting as
    underwriter for a Koll IPO;

·

In respect of the January/February
    2007 statements identified by the trial judge, in particular Robertss memo of
    February 16, 2007, Shnaider testified he did not understand much about the
    value of the Reef property: I understood that the company may be worth over a
    hundred million dollars, but there is also I understood that well need to
    invest considerable amount of money in order to get the oil out from the ground
    to market;

·

Finally, in the trial cross-examinations
    of Roberts and Shtaif, there were no clear allegations that statements about
    the range of a possible IPO value for Magellan, and then Koll, amounted to
    fraudulent misrepresentations.

[201]

Third, in their written
    closings, the respondents specifically identified three statements they alleged
    constituted fraudulent misrepresentations: (i) BDW had invested money in
    Magellan; (ii) the true identity of Howard; and (iii) the status of the SibinTek
    treasury notes. The three IPO-related Statements found by the trial judge to
    constitute deceits were not identified by the respondents as such in their
    written closing. The substance of their oral closing submissions tracked those
    of their written submissions.

[202]

Finally, closing submissions
    at trial concluded in June 2013. The respondents obtained leave to amend their
    statement of claim thereafter. However, they did not amend their claim to plead
    that any of the IPO-related Statements amounted to fraudulent
    misrepresentations.

[203]

Given those circumstances, it
    was not open to the trial judge to find that any of the IPO-related Statements
    amounted to fraudulent misrepresentations for which Shtaif and Roberts were
    liable. The respondents did not allege they were such; therefore, it was not
    open to the trial judge to find they were. To so find, with respect, was an
    error.

[204]

The trial judge recognized
    that the strength of the respondents claim against Shtaif and Roberts might
    well be weaker in respect of the post-June 21, 2006 events concerning Koll. At
    paras. 1187-8 she wrote:

I have carefully considered the submission of all the
    Defendants that all of the pre-June 20 misrepresentations were known to be
    false after July 15 and that the Plaintiffs continued in the joint venture
    because they thought the business plan was a good one. Had I accepted that
    submission, Midland's damages against Shtaif would have been the same as those
    caused by Boock and De Freitas. Without further misrepresentations by Roberts
    and Shtaif after July 15, 2006, about the value of Reef, and the views of the
    investment bankers, and Koll's prospects on the IPO, I would have seriously
    questioned the Plaintiffs' assertion that Midland was justified in continuing
    to inject into Koll the balance of the $50 million, in order to mitigate their
    earlier damages.

Should a higher court find that I should have accepted this
    submission, I note that by July 15, Midland had advanced a further $18.5
    million to purchase Reef. By December 2006 it had advanced another $9.5 million
    to purchase Invenskoye. As at March 1, 2007, $41,900,000 had been expended on
    Koll.

[205]

The trial judges error in
    finding any liability in respect of the IPO-related Statements does not affect
    her findings of liability of US$8.27 million against both Shtaif and Roberts for
    their pre-June 21, 2006 conduct. However, as I indicated in para. 102 above,
    the trial judge should not have awarded Midland damages for advances made after
    June 21, 2006. Her finding of liability against those appellants for post-June
    21, 2006 Midland advances rested on her conclusion that the IPO-related Statements
    constituted deceits. Since I have found she erred in so concluding, the balance
    of the judgments against Shtaif and Roberts for post-June 21, 2006 conduct must
    be set aside, save for their liability in respect of the Magellan promissory
    notes.

B.

The Magellan
    promissory notes

The issue stated

[206]

As described earlier, on June
    21, 2006, before he resigned as Magellans CEO, Shtaif signed Magellan
    promissory notes in favour of himself (over $1.28 million) and Roberts (US$44,796).
    Shnaider and Shyfrin were not told about these notes. Notwithstanding that
    under the Settlement Agreement all remaining Magellan cash was to be returned
    to Midland, Roberts subsequently located Magellan funds in Faskens trust
    account and the TD Bank. He commenced lawsuits on the notes, secured Boock/Krakowsky/Howards
    cooperation to deceive the court to obtain consent judgments, and then
    garnished the trust and bank accounts to satisfy the judgments in favour of
    Shtaif and himself.

[207]

The trial judge found Shtaif
    and Roberts liable for wrongful conduct conspiracy for their seizure of those Magellan
    funds and gave judgment against them in the amount of $100,482.02 and
    $39,570.66, respectively.

[208]

Shtaif does not seriously
    challenge this finding on appeal, limiting his submissions to observing the
    respondents had pleaded misappropriation, not conspiracy, in respect of the
    garnished funds. On his part, Roberts argues: (i) the respondents pleading of
    conspiracy was too vague; (ii) Midland was not entitled to the return of the
    funds, in any event; and (iii) Roberts was lawfully entitled to the funds as
    reimbursement for pre-June 21, 2006 expenses.

[209]

The respondents concede they
    pled misappropriation, not conspiracy. However, they point out that much of the
    evidence about a conspiracy only came to light at trial because Roberts failed
    to produce his complete files on the issue before trial. They submit Shtaifs
    and Robertss use of the Magellan promissory notes to obtain the monies in the
    two accounts was a live issue at trial.

Analysis

[210]

I would not give effect to
    this ground of appeal. Shtaif and Roberts fully responded to the issue at trial,
    and the trial judge granted the respondents leave to amend their pleading after
    closing submissions to advance their claim to recover the Magellan funds in the
    Faskens and TD accounts. There was no unfairness in the trial judge ultimately
    grounding liability in conspiracy.

[211]

As to the remainder of
    Robertss submission, the trial judge dealt fully with the issues at paras. 1063-1069
    of her reasons. At para. 1063, she stated:

The evidence is clear that in 2007, Roberts and Shtaif
    recovered money from Magellan using the secured demand promissory notes dated
    June 23, 2006 they had given themselves on June 21, 2006. They did not tell
    Shnaider and Shyfrin that they knew there were funds to Magellan's credit at
    Fasken's and the TD Bank, that they had given themselves the notes, that they
    were suing Magellan on those notes and taking other steps to collect on them.

The trial judge
    went on to conclude that (i) Shtaif and Roberts acted in concert; (ii) their conduct
    was unlawful; (iii) their conduct was directed toward the respondents; (iv)
    injury was likely; and (v) injury was caused.

[212]

Ample evidence supported those
    findings. There is no basis for appellate intervention.

IX.

FAILURE OF THE RESPONDENTS TO MITIGATE THEIR DAMAGES

[213]

Shtaif and Roberts also submit
    the trial judge erred in finding the respondents acted reasonably to mitigate
    their damages.

[214]

I am not persuaded by the
    appellants arguments. The trial judge made two key findings on the mitigation
    issue: (i) the appellants lacked the financial wherewithal to buy-out the
    respondents position in Koll; and (ii) the respondents acted reasonably in
    their efforts to secure the ultimate sale of the Reef property. Again, ample
    evidence supported both findings, and the appellants have not identified a
    palpable and overriding error that would permit appellate intervention.

X.

ROBERTSS COUNTERCLAIM

[215]

The trial judge dismissed
    Robertss counterclaim seeking damages for the loss in value of his Koll shares
    based on the terms of the June 21, 2006 re-organization agreement and for
    breach of an employment contract with Koll. Roberts appeals both findings.

[216]

His submissions on appeal
    simply repeat those he advanced at trial. In her reasons, the trial judge dealt
    at length with both of Robertss submissions. She made extensive findings of
    fact, many based on credibility assessments. Roberts has not demonstrated the
    trial judge committed any palpable and overriding error in reaching her
    conclusions. I therefore would dismiss his appeal in respect of his
    counterclaim.

XI.

DISPOSITION

[217]

By way of summary, I would
    dismiss (i) Boksermans appeal, (ii) Shtaif and Robertss appeal in respect of
    the trial judges finding of liability in the amount of US$8.27 million for
    pre-June 21, 2006 conduct, and (iii) Robertss appeal of the dismissal of his
    counterclaim.

[218]

I would allow the appeals of
    Shtaif and Roberts of the findings of liability in respect of their post-June 21,
    2006 conduct, save and except for the liability in respect of their recoveries
    under the Magellan promissory notes. Consequently, I would vary para. 3 of the
    Judgment concerning Roberts by substituting the amount of US $8,309,570.66
    (US$8.27 million + $39,570.66), and vary para. 4 of the Judgment concerning
    Shtaif by substituting the amount of US $8,370,482.02 (US$8.27 million +
    $100,482.02).

[219]

If the parties are not able to
    agree on the costs of the appeal, any party seeking costs shall file brief
    written submissions, including a bill of costs, no later than May 5, 2017. Any
    brief responding submissions shall be filed by May 19, 2017.

[220]

One final observation. The
    trial judge devoted a considerable amount of time to inserting transcript
    references in her reasons for much of the evidence she reviewed. Such
    references can greatly facilitate appellate review. Unfortunately, the
    pagination of many of the transcripts filed by the parties on this appeal did
    not replicate the pagination used by the trial judge in her reasons. As a
    result, the benefit of her effort was lost. Where a trial judge undertakes
    including such detailed references in her reasons, appeal counsel must ensure
    the appeal transcripts employ the same pagination.

Released: April 20, 2017 (D.D.)

David Brown J.A.

I agree. Doherty J.A.

I agree. L.B. Roberts J.A.

[1]
The operators of a
pump and dump scheme artificially raise,
    or pump up, the price of stock in a company through misleading statements to
    other investors, and then sell, or dump, their shares in the company when the
    stock reaches a higher price.