Bank Leu AG, one of Switzerland’s oldest banks and now a subsidiary of Credit Suisse First Boston Corporation, was successful at trial in its claim under the Ontario Business Corporations Act against Gaming Lottery Corporation (GLC). The decision was announced on November 29, 2001. Bank Leu’s claim arose out of a pledge in Switzerland of OLGC shares, among other security, in 1994 by Guido Bensberg, as security for a US$5 million loan.
Share certificates representing 2.5 million shares of GLC were delivered to Bank Leu in Canada through its Canadian correspondent, Bank of Montreal. After Bank Leu had advanced funds to Bensberg, it was discovered that the shares had not been validly issued because they were never paid for, but that they had been put into circulation as part of a scheme called a stock roll programme. In return for creating and delivering apparently valid share certificates, GLC was to receive millions of dollars in interest payments over the course of a 12-month period. Once created for the programme, the share certificates were leased to individuals or companies for balance sheet or collateral enhancement. Bensberg and others, among other things, pledged the lessees of shares of GLC and other public companies as security for substantial loans. The scheme has been the subject of both SEC and OSC proceedings.
Bensberg defaulted on his loan with Bank Leu. The bank attempted to realize on its security. GLC blocked the transfer of the shares on the grounds that the share certificates did not represent validly issued shares because they had not yet been paid for. Bank Leu sought an order that GLC compensate the bank as a holder in good faith of the shares. GLC brought in all the parties, by way of cross claims and third-party claims that had been involved in these programmes in Canada, the U.S. and Europe.
On the main claim of Bank Leu, Justice Sidney Lederman of the Superior Court of Justice found in favour of the bank and ordered payment of Bensberg’s debt, now more than $10 million, by GLC. This award will be paid primarily out of $10 million being held in trust under an interlocutory order obtained in 1996.
Among other things, Justice Lederman dismissed a third-party claim brought by OLGC against B.C.-based North Shore Credit Union.
In May 2002, Justice Lederman awarded Bank Leu its costs of the action on a substantial indemnity (solicitor and client) basis.
Torys LLP acted for Bank Leu, with a team that included Ed Babin and Crawford Smith. Larry Levine and Messod Boussidan of Levine, Sherkin, Boussidan in Toronto acted for GLC. Lyndon Barnes and Don Hanna of Osler, Hoskin & Harcourt LLP acted for North Shore Credit Union. All the other defendants by cross claim or third-party claim settled prior to the trial or failed to appear.