Philip Gennis on untangling the multi-million dollar Banners Broker scheme

Philip H. Gennis, J.D., CIRP, LIT
Senior Principal
msi Spergel inc

For the past five years, Philip Gennis has quietly been working to untangle the multi-million dollar, “Banners Broker” scheme, employing many of the tools in an insolvency practitioner’s toolkit. Philip sits down with us to discuss this “once-in-a-career” file.


1) Can you briefly explain how the scheme operated?

Banners Brokers International Inc. (“BBIL”) and Stellar Point Inc. were part of a group of at least eight related companies and service providers. Together they were involved in and/or operated the “Banners Broker” online enterprise. Banners Broker, as it was described to affiliates, was an internet marketing company structured as a “multi-level marketing” program engaged in the sale of “banner” advertisements on the internet. Individual affiliates were told that their money spent on Banners Broker advertising products was contributed towards advertising space on high-traffic websites and gathering advertising revenue based on the traffic to those advertisements.

In reality, Banners Broker did not track website traffic, nor did it have access to high-volume websites. It did not have the infrastructure to track an affiliate’s success or lack thereof in investing in online advertising. Banners Broker did not earn revenue, and relied instead on recruitment and investment enticement for cash flow.

The Banners Broker enterprise operated through a variety of entities that were used interchangeably and projected the image of being a singular entity. Creditors and third party service providers believed they were dealing with “Banners Broker” rather than BBIL, Stellar Point or any other individual entity.

2) How did the scheme unravel and how did you get involved?

BBIL was incorporated in the Isle of Man (“IOM”). A BBIL creditor brought an application for a Winding-Up Order over BBIL under the IOM Companies Act. BBIL was placed into liquidation pursuant to an Order of the High Court of Justice of the Isle of Man on February 26, 2014. The Manx Court appointed Mann Benham IOM Counsel and Paul Appleton, managing partner of David Rubin & Partners Inc., an experienced UK insolvency practitioner in an effort to stop any dissipation of assets and to ensure that an appropriate forensic investigation was undertaken.

The Liquidators seized an IOM Bank Account and through investigation learned that the principals of BBIL were all residents of Canada. This realization led to our appointment as an Investigative Receiver. It became apparent early on in this appointment that there was, in addition to the residence of the principals, a strong connection with Canada relative to assets.

On August 22, 2014, pursuant to an application by the Joint Liquidators, the Isle of Man liquidation proceeding was recognized by the Ontario Court under the cross-border provisions of the Bankruptcy and Insolvency Act. That same date, and by further order of the Ontario Court, msi Spergel inc. was appointed Receiver of BBIL in Canada. Both Spergel and the Rubin firm are members of ICIN.

 

3) Where do you begin when you receive an appointment such as this; what were your first steps and strategy?

The Order of Madam Justice Matheson granted to the Receiver, in addition to standard receivership powers, investigatory powers, including the ability to compel third parties to produce relevant information and documents concerning the business affairs and dealings of BBIL and to compel individuals reasonably believed to have knowledge of BBIL’s affairs to be examined under oath.

Our primary objective was to prevent the misappropriation of assets in Canada by the known principals of the company. To that end, our first step was to commence a series of both off and on record examinations of the principals of BBIL and an exhaustive list of parties connected with the enterprise. These interviews and examinations helped the Receiver to more fully appreciate the depth and breadth of the enterprise and to begin the process of tracing funds. In addition to these efforts, correspondence was sent by the Receiver to all relevant Canadian electronic payment processors, as well as to all Schedule I, II and III financial institutions in Canada in an effort to obtain information as to the nature and extent of BBIL’s business activities in Canada.

4) What are some of the issues/roadblocks that can arise when you are pursuing an investigation such as this?

As the scheme progressed, the principals set up a host of associated corporations to mask both their illegal activities and the flow of money. Throughout the scheme, the principals and their associated corporations had investors pay their “investment” money to merchant account providers (i.e. legitimate corporations that process credit card payments). Those funds were then diverted by the principals and their associated corporations to various offshore and other bank accounts controlled by them. The use of offshore financial institutions has been the primary roadblock to the Receiver in its tracing of funds and ultimately its realization of assets.

5) What are some of the most useful tools an insolvency practitioner can use on a file such as BBIL?

Throughout the course of this file, we have made use of a number of procedural tools including Mareva Injunctions, Freezing Orders, applications to Courts in foreign jurisdictions for assistance, examinations under oath, in addition to general commercial litigation aimed at recoveries.

6) A criminal investigation was launched during the insolvency proceedings. How did this assist or hinder your mandate?

The criminal investigation was actually launched after the Isle of Man Liquidation and before our appointment. The Report of the RCMP investigator, which was provided to us, led us to a number of related companies resident in Canada. As a result, there are presently eight companies forming part of the BBIL group of companies that are subject to ongoing receivership and insolvency proceedings in Canada.

On April 27, 2017, the principals plead guilty to operating a scheme of pyramid selling. They were both sentenced on the same day to serve a conditional sentence of two years less a day and to pay fines of CDN$2,500,000 in the case of one of the principals and CDN$1,435,002 and US$6,067 in the case of the other.

Throughout the criminal proceedings and continuing to this day, the Crown has cooperated with the Receiver to the extent possible in the circumstances of the criminal proceedings.

7) This is one of only a few cases where the Centre of Main Interests (“COMI”) was changed midway through a file. What was the rationale and how did the courts react to the request?

Although BBIL was incorporated in the Isle of Man, its operations were completely controlled by Canadian residents working in Toronto. The Ontario Superior Court accepted that there was jurisdiction in Ontario to appoint a receiver over BBIL in Canada. Reports were filed with the Isle of Man Court in support of the application of the Joint Liquidators outlining the findings of the receiver and seeking the assistance of the Isle of Man Court in transferring the COMI. With the approval of the IOM Court, a transition services agreement was entered into by Spergel and the Joint Liquidators and on December 9, 2016 the COMI was transferred to Ontario.

8) These types of files often take years to administer. Do you see an end in sight and what, in your opinion, would constitute a successful ending?

Unfortunately the nature, international scope, and economics of this particular insolvency will make it very difficult for many creditors to achieve a level of recovery such that they might consider the process to have been a true “success”. However, answers are being provided, money is being traced, judgments and criminal convictions are being obtained, and wrong doers are being held to account. The process is nearing completion and we are continuing to work to see that it is as successful as possible.

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