In Boughner v Greyhawk Equity Partners Ltd.,1 the Ontario Superior Court of Justice recently clarified the preferable method for distributing money out of a fund comprised of comingled cash contributed by many innocent investors who were victims of a fraudulent investment scheme. Where practical, courts will apply the lowest intermediate balance rule. The rule prevents early investors in a fraudulent scheme from benefiting from the contributions of later investors.


Over a period of nearly 11 years, 24 investors made investments totaling several million dollars in the Greyhawk Fund. The fund initially seemed like a highly profitable investment vehicle. In 2011, however, one investor discovered the fund to be a fraud. The Court appointed a Receiver. The Receiver found a shortfall of over US $3.5 million, which represented the loss of principal amounts contributed by investors who did not redeem their contributions prior to the discovery of the fraud.

The issue arose as to how to allocate the remaining funds to the victims of the fraud. The investors' funds had been comingled, and all the investors were equally blameless.

Justice Morawetz was faced with the question of whether to distribute pro rata on the basis of original contributions to the fund (the pro rata method), or pro rata on the basis of actual fund performance during the period that each investor was actually invested in the fund. The later method is known as the lowest intermediate balance rule.

With distribution pro rata on the basis of contributions, victims collect based on a proportionate share of their total investment, regardless of when it occurred. Distribution following the lowest intermediate balance rule takes into account when the investments were made. An investor cannot claim an amount in excess of the lowest balance in a fund subsequent, and attributable, to their investment.

The Court used an example fact pattern to illustrate the difference between the methods: John invests $100 in a fund. The value of the fund then declines to $50. Jane then invests $100, increasing the fund's balance to $150. The value of the fund then further declines to $120.

Applying the lowest intermediate balance rule, John could not claim more than $50, because that is the lowest balance in the fund prior to Jane's investment; the initial decline from $100 to $50 is borne entirely by John. Jane's $100 contribution constitutes 2/3 of the $150 in the fund. As a result, when the fund declines to $120, 2/3 of the decline is borne by John, while 1/3 is borne by Jane. Therefore, of the $120 remaining in the fund, John gets $40 while Jane gets $80. If, on the other hand, the funds were distributed pro rata based on original contributions, John and Jane would each receive $60, since both invested an equal amount.

In Greyhawk, the choice as to which method to use would have consequences for certain of the victims amounting to several hundreds of thousands of dollars.

the decision

Both parties agreed that the proper distribution of the remaining funds should be determined according to what was "just, convenient and equitable." The parties disagreed as to which of pro rata or the lowest intermediate balance rule distribution was the default rule to follow, over which result was just in the circumstances, and whether calculations using the lowest intermediate balance rule were prohibitively inconvenient in the circumstances.

Noting competing jurisprudence as well as some ambiguity in jurisprudential use of certain terms when it came to methods of tracing, Justice Morawetz found that the common law endorsed the lowest intermediate balance rule as the presumptive method, and held that it should be applied unless the facts render it "practically impossible to do so." He observed that distribution pro rata is an exception to the general rule. The pro rata method is appropriate in circumstances where the lowest intermediate balance rule is not economically feasible, such as in cases involving very large numbers of beneficiaries and transactions, or unworkable business records.

In this case, the uncontroverted evidence of the Receiver was that calculations using the lowest intermediate balance rule were possible, so the presumptive method was followed. The court further held that the result was just and equitable in the circumstances. By the time of the later investors' investment, it was clear that the earlier investors had already lost over 88% of their investments' value, so it would not be fair to make the later investors subsidize the losses of the earlier investors that had occurred prior to their involvement.

tempering expectations for victims of fraud

This case clarifies courts' preference for the lowest intermediate balance rule when dealing with competing claims to comingled funds, even where challenges are faced in making the calculations. However, it also confirms that pro rata allocation is still available when calculations using the lowest intermediate balance rule are unworkable.

Investors and Receivers should be aware that, among victims of fraudulent investment schemes who are equally innocent, those who were invested longest may well bear the greatest losses.