The words “not for profit corporation which raises funding for childhood cancer charities” and “extensive fraud and misappropriation of funds” should not appear together in a case, but they do in the recent decision of the Ontario Superior Court of Justice, Coast to Coast Against Cancer (“Coast”) v. Sokolowski 2015 ONSC 7388. The actions of the defendant in this case, Steven H. Sokolowski, are both shocking and disturbing.
The plaintiff in this case, Coast to Coast Against Cancer, is in fact, the entity described above. The charities for which it raises funds “improve the quality of life and survival rate of children impacted by cancer” according to the decision. Mr. Sokolowski was one of the organization’s original founders, and for many years was a member of its board of directors. In his last two years with the organization, he occupied the role of Secretary, which meant that he was in charge of the corporation’s day-to-day business.
In August 2014, an internal audit of the organization revealed that Mr. Sokolowski, with the help of The Courtyard Group of Companies (“Courtyard”) a corporate entity in which he was the sole officer and director, and several other individuals, allegedly carried out an extensive fraud and misappropriation of funds from the corporation in excess of $700,000.
The plaintiff Coast brought a summary judgment against Mr. Sokolowski in which it argued fraud and breach of fiduciary duty. According to Coast, its internal audit investigation revealed that Mr. Sokolowski was responsible for an extensive scheme in which he created and submitted false invoices, and prepared and cashed Coast’s cheques to him and Courtyard, for reimbursement. The decision does not reveal what prompted the internal audit. However, details of the fraud are set out by Mr. Justice Diamond, as he accepted and relied on a report by the accounting firm Deloitte. Among other things, Mr. Sokolowski:
- Approved a series of payments to a woman with whom he was romantically involved for services that were not provided to Coast. These payments amounted to $31,425;
- Created a series of fake invoices in the name of a current girlfriend, for services she did not perform for Coast, and arranged for payment, which the judge stated amount to misappropriation of $107,424;
- Purported to pay invoices for web services himself, and then submitted his expenses for reimbursement resulting in payments of $84,246. These services were never provided to Coast;
- Arranged for Coast to remit payment to the Royal Canadian Yacht Club in the amount of $21,152 for a personal event hosted by Sokolowski;
- Directed Coast to deliver post-dated cheques to the landlord of the property he and his girlfriend lived in, in the amount of $3,650 a month, ostensibly for “storing materials for Coast”;
- Further directed Coast to reimburse his expenses from a third party supplier of wine and alcohol in the amount of $15,055.
In addition, Mr. Justice Diamond identified additional expenses that, according to the audit report, were either clearly misappropriated by Mr. Sokolowski or were otherwise questionable and unsupported by documentation. These included expenses relating to hotel receipts, electronics, meals, entertainment, marketing, gas/vehicle and insurance charges.
In the face of Mr. Sokolowski’s behaviour, the Court had no difficulty in granting the plaintiff’s summary judgment motion, stating that the evidence it had been presented was “overwhelming”.
What does this mean for employers?
Mr. Sokolowski was a member of the Board of Directors, and does not appear to have been an employee of Coast. However, given his role in the day-to-day operations of the company, his role was similar to that of a senior employee. Therefore, by analogy, this case raises some important issues for employers vis-à-vis financial management and impropriety:
- In our experience, fraud and misappropriation is often found by accident. This raises the question: how often does it occur and remain undetected? Employers should put into place financial checks and balances so that this type of activity cannot go underground. Regular audits, reviews by someone other than the person in charge, and the use of external accountants are a few of these types of mechanisms. This is particularly true when the organization is dominated by one person.
- Do not assume that all employees who occupy senior positions, and/or who have control of the purse strings are honest. This is particularly true in “do good” organizations where the assumption is that all members behave in an altruistic manner. Sometimes, employees who have easy access to money help themselves, even if that money is destined for people who really need it. They may simply be greedy. They may tell themselves that they will soon repay it and it is nothing more than a temporary loan. Perhaps they have a gambling problem. Regardless of their motivation or explanation, taking money from one’s employer is stealing.
- Hold these employees to account. It may be that once confronted, the employee may be able to repay the employer. However, in many cases, this does not happen as the employee claims he or she did nothing wrong, or that he or she does not have the means to make such a payment. Here, Mr. Sokolowski’s bad behaviour has resulted in not only a decision that anyone can read, but also a court order which Coast can now try and enforce.