People accused of fraud may have more time to move money out of their bank accounts as a result of a recent decision from the Ontario Court of Appeal, especially if those trying to freeze such accounts do not act quickly in following up with an injunction.

In a ruling in January, the court found that Royal Bank of Canada was not entitled to impose a freeze for almost two years on certain bank accounts of Ankur Rastogi, who is alleged to have made $700,000 at the bank’s expense in an arbitrage trading scheme.

RBC had been taking advantage of Section 437(2), a provision of the Bank Act that offers a quick and easy way for banks to freeze accounts in situations in which someone other than the account-holder lays claim to the money, according to fraud litigator Peter Roberts, partner with Lawson Lundell LLP in Vancouver.

Sec. 437(2), sometimes referred to as a “free injunction,” allows banks to freeze funds that are claimed by someone else if the bank has been named in a lawsuit and been served with a writ in connection with the disputed funds.

Until now, Roberts says, litigators have used this section to get bank accounts frozen without having to go to court for an injunction. They can accomplish this simply by launching a lawsuit against the alleged fraudster and naming the bank that holds his or her account as a defendant in the suit. In most cases, the bank will usually invoke Sec. 437(2) of the Bank Act to freeze the account until a court has decided who is entitled to the funds.

This is what RBC did in the case of Rastogi. The bank alleged Rastogi misused his position as an employee of RBC by taking advantage of a loophole in the RBC online trading system and his access to an employee preferred exchange rate to complete hundreds of currency-exchange transactions on his own behalf at the opening of the market each day.

Rastogi, however, claims that he was not an RBC employee but was an employee of RBC Dominion Securities Inc. He admitted to making trades on his own behalf but said that he used publicly available information and traded at rates set by RBC.

Rastogi also maintains that his trading was well known to RBC staff at the branch at which he kept his accounts and that he did not breach his contract of employment by making improper use of information made available to him as part of his employment.

In addition to counterclaiming for the release of funds in some of the frozen bank accounts, Rastogi is also claiming damages from RBC for damages caused by the freeze and for wrongful dismissal.@page_break@The substance of Rastogi’s lawsuit, which was launched in September 2008, has yet to be heard. The January decision deals only with the question of freezing certain bank accounts. The Appeal Court agreed that RBC, which launched the action against Rastogi, did have the right to freeze its own accounts. However, the court also ruled that RBC did not have the right to freeze bank accounts belonging to Rastogi at other corporations — RBC Direct Investing Inc. and Toronto-Dominion Bank.

Neither RBC Direct nor TD were making a claim against Rastogi.

The court held that RBC did not have a right to interfere with Rastogi’s property held in accounts at RBC Direct and TD, pending the resolution of RBC’s claim for restitution of the trading profits. While RBC could have sought an injunction that would effectively freeze these other accounts, it had failed to do so.

Injunctions are typically more expensive and time-consuming to obtain than an account freeze under the Bank Act. But the judgement says RBC did not have the right to use the Bank Act to achieve a de facto injunction without a court order.

Noted Justice David Doherty’s decision: “Surely RBC would not argue that it was entitled to go into Rastogi’s garage and unilaterally seize his vehicles and hold them until trial if it had an arguable case that the vehicles were purchased with the proceeds of the currency trading. I do not see how RBC’s legal position is improved because the assets in issue are debts owed to Rastogi by another bank and an affiliate of RBC.”

The judgement also notes: “Any entitlement RBC has to freeze Rastogi’s accounts pending trial is not improved merely because RBC Direct is a subsidiary of RBC.”

The Appeal Court’s finding that there was no legal basis for TD to withhold Rastogi’s funds may well place an obstacle in the way of those trying to recover funds from fraudsters before they can hide it away, Roberts says. The Appeal Court’s message, says Roberts, is that you can’t keep a bank account frozen just by launching a lawsuit without following up by going to court to seek an injunction. Adds Roberts: “You can’t sit around and do nothing.”

If plaintiffs can no longer rely on the Bank Act to freeze bank accounts quickly, says Roberts, they will have to take the extra step of applying for a court injunction. This will not only mean extra work and expense, but it will also take more time.

And time is crucial in fraud cases, Roberts adds: “If the defendant gets wind of an injunction, they [can] move the money offshore or take it out in cash.”

The decision will have greater effect in Ontario than in other Canadian jurisdictions. But the Bank Act is a federal law, so courts in other provinces will take note of the Ontario ruling although it will not be binding on them.

Furthermore, other judges may take the view that the ruling is not generally applicable since it was based on the “egregious” facts of this case, Roberts says — namely, that RBC failed to press its claims against Rastogi in court for 22 months after launching the initial suit. IE