The Supreme Court of Canada has declined to hear an appeal from an investment vehicle that was seeking to recover losses from its insurer, after falling victim to a Ponzi scheme.
In 2023, the Ontario Superior Court of Justice rejected a claim brought by Surefire Dividend Capture, LP (SDC) — a Canadian special purpose vehicle — that sued insurer National Liability & Fire Insurance Co., after it denied coverage under a fidelity bond for losses suffered when SDC invested in a U.S. hedge fund that turned out to be operating a Ponzi scheme.
According to the court’s decision, in 2019, SDC obtained insurance coverage for theft and fraud by its employees and its sub-managers. That same year, it began making investments with a U.S. hedge fund, Broad Reach Capital LP, which was later revealed to be engaged in fraud.
In 2021, the fund’s manager, Brenda Smith, pleaded guilty to one count of securities fraud in the U.S., admitting that the fund was basically a Ponzi scheme.
SDC sought coverage for its losses from its insurer, which denied the claim, arguing that the terms of its coverage didn’t extend to the hedge fund manager. SDC then sued the insurer, seeking US$46.6 million in damages.
The court sided with the insurer, concluding that the terms of the insurance coverage didn’t apply to the fund manager that perpetrated the fraud, based on its interpretation of the way the policy was written.
The court noted that, while SDC testified that it told the insurer that it was seeking protection from losses caused due to misconduct by its sub-advisors when it acquired coverage, the actual terms of the policy didn’t allow for it to claim the losses caused by the fund manager.
SDC appealed that ruling to the Court of Appeal for Ontario, which rejected its appeal, upholding the lower court’s ruling, and finding that the judge made no error in denying its claim.
Now, the Supreme Court has declined to hear the case.