Three accounting firms are among the defendants in a class-action lawsuit that seeks compensation for investors who lost $130 million through now-bankrupt Mount Real Corp.

Former Mount Real CEO Lino Matteo and two securities custodians — B2B Trust, a subsidiary of Laurentian Bank of Canada, and Penson Financial Services Canada Inc. — are also named as defendants in a Quebec Superior Court motion seeking authorization to bring forth the class action.

Three Montreal-based law firms teamed up on the lengthy job of preparing the litigation, which alleges Mount Real investors “fell victim to a classic swindle commonly known as a Ponzi scheme.” In a Ponzi scheme, investors are paid abnormally high returns with money from subsequent investors until the entire pyramid collapses.

About 1,600 people purchased promissory notes issued by Mount Real or its affiliates between 1997 and 2004. The Toronto Stock Exchange-listed company, whose main activity was telemarketing magazine subscriptions in the U.S., was shut down by Quebec’s financial services industry regulator, the Autorité des marchés financiersin November 2005.

“This class action aims to compensate the members of the group for the losses they suffered following a vast fraud that was made possible by the negligence of named professionals and financial services companies,” the motion states. “MRC was nothing but a façade that had practically no real activities, but whose credibility was used to fraudulently sell promissory notes to members of the group.”

Besides Matteo, B2B Trust and Penson, the other defendants are: former Mount Real chief financial officer Paul D’Andrea, Deloitte & Touche LLP, BDO Dunwoody LLP and Schwartz Levitsky Feldman LLP.


The suit accuses Matteo of being “the mastermind and principal actor in the fraud.” It also alleges the securities custodians and accounting firms — which acted as Mount Real’s auditors at different times from 1997 to 2004 — were “important cogs in this vast fraud.

“By signing audit reports supporting financial statements riddled with lies and omissions,” the claim says, “the auditors committed faults that make them jointly responsible with the other defendants for the prejudices suffered by the group.”

B2B Trust and Penson, the suit alleges, improperly “confirmed the value of fraudulent investments. As well, by allowing the use of their name and reputation, B2B and Penson made possible the fraud of Matteo and his accomplices.”

For years, Mount Real presented itself as an up-and-coming professional services company with consistently growing revenue and profits. Financial statements showed that net profit reached $11.4 million in 2004 on revenue of $45.7 million.

But a government-appointed administrator who took over the firm in late 2005 found an empty shell with little in the way of ongoing business, the suit notes.

In September, the AMF lowered the boom on Matteo and other officers of Mount Real, laying 682 charges under the Quebec Securities Act against them.

The AMF accuses the officers of engineering a complex corporate empire that hoodwinked investors and regulators through false statements, phony transactions and illegally offered investments. The AMF is asking for fines totalling $551.5 million. Many charges also carry a jail term of five years less a day. Matteo faces 308 charges, and the AMF is seeking fines of $204 million, plus jail time on the 74 counts that carry such a penalty.

Also charged are D’Andrea, former president and chief operating officer Joseph Pettinicchio, former vice president Laurence Henry and former corporate secretary and director Andris Spura.

D’Andrea has pleaded guilty to 131 charges and has been co-operating with the AMF in return for a promise the agency will not seek a jail term in his case.

In January 2007, the AMF laid 619 Securities Act charges against 24 investment advisors who sold Mount Real notes through mutual fund dealer iForum Financial Services Inc. and full-service brokerage iForum Securities Inc. , both now bankrupt. Of those advisers, five have been convicted on a total of 143 charges and fined $802,000.


The lead plaintiff in the proposed class action is Montrealer Andrée Ménard, who lost slightly more than $130,000 in promissory notes.

Janet Watson, another investor who lost almost $70,000 of her retirement savings in Mount Real notes, wrote in an e-mail: “I am very relieved and happy that the class-action suit has finally been launched. It was a long and frustrating wait due to the complex nature of the case. Obviously, I hope that the class action results in some sort of monetary compensation for the credi-tors. But I also hope that the parties involved will be forced to take some accountability for their actions.”

@page_break@Most of the promissory notes sold to clients were actually issued by companies affiliated with Mount Real — MRACS Management Ltd., Real Vest Investments Ltd. and Real Assurance Acceptance Corp.

Bruce Johnston, one of the lawyers involved in the case, maintains this doesn’t present a problem for the class action. “At the beginning, Mount Real sold [the promissory notes] itself,” he says, “and then it began selling them through affiliates but guaranteeing the refund.

“Mount Real stayed at least notionally at the centre of the scheme,” Johnston adds, “and its own health was an essential part of the sales scheme. It’s the keystone, if you will, of the whole edifice. If you pull it out, everything falls.”

Johnston says it was a long process to prepare the class action because of the corporate web that had been created around Mount Real. “Before we take a file, we have to ascertain whether there are grounds and the factual background was intentionally made to be very complicated in this file,” Johnston says. “The operations of Mount Real were carried out through an incredible maze of corporate entities, and it turns out most of them are controlled by the same people.” IE