Dylex trustee fails to prove fraud: law firm

It says the trustee's allegations of fraud against Hardof Wolf can be summarized as involving its purchase of Dylex mainly with Dylex's own money while leaving creditors' bills unpaid.

The Globe and Mail
January 16, 2002

Dylex trustee fails to prove fraud: law firm
Stikeman responds to scathing reports
Marina Strauss

The trustee of bankrupt Dylex Ltd. has failed to provide sufficient evidence to substantiate its allegations that Dylex's new U.S.-controlled owner engaged in fraudulent activity in its acquisition, the owner's former law firm says.

"The trustee refrains from stating he believes that a fraud occurred," says a document filed in court yesterday on behalf of the law firm Stikeman Elliott.

Stikeman represented the owner, Hardof Wolf Group Inc., which has ties to U.S.-based dollar-store chain McCrory Corp., in its $68-million purchase of Dylex on May 16.

It was responding to two scathing reports from the trustee, Richter & Partners Inc. that suggest there may be evidence to conclude that Hardof Wolf engaged in fraudulent or other unlawful activities.

"This is a very long way from the necessary prima facie evidence of fraud," Stikeman says in its document.

Another document from the trustee, filed with the court this week, goes even further, saying there is is "very strong prima facie evidence of [Hardof Wolf's] participation in fraudulent or otherwise unlawful activities, both on its own behalf and, subsequent to May 16, 2001, as directing … Dylex."

Today, the trustee will ask Ontario Superior Court to lift various protections of privilege and confidentiality — among them the solicitor-client privilege between Stikeman and Hardof Wolf — to allow the trustee to continue its investigation into the demise of Dylex.

Toronto-based Dylex was once a mighty retailer that ran some of the most familiar banners in the country, such as Tip Top Tailor and Club Monaco. By the end, it had disintegrated into a company owning only two chains: discounter BiWay and women's wear retailer Fairweather. Late last year, the trustee sold the latter and BiWay was closed.

Stikeman wants to stop the court from dropping the shield of solicitor-client privilege on the basis that there is no proof of a fraud or unlawful act having been committed. In the case of fraud, solicitor-client privilege would not apply.

"In essence, the trustee is conceding that the investigation to date has yielded concerns as opposed to any prima facie evidence of fraud against [Hardof Wolf] or anyone else," Stikeman's document says.

It says the trustee's allegations of fraud against Hardof Wolf can be summarized as involving its purchase of Dylex mainly with Dylex's own money while leaving creditors' bills unpaid.

Stikeman says that securities regulators, including the Ontario Securities Commission, were aware that Hardof Wolf bought the assets of Dylex with Dylex funds — and still approved the acquisition "and seemed untroubled by the notion."

The regulators exempted the takeover from provisions of the Ontario Securities Act and comparable laws in other provinces, even though the transaction was not structured as a traditional takeover bid. The deal required that Hardof Wolf get access to Dylex's cash on closing to fund the purchase.

Stikeman also says in its document that "there is a complete absence of evidence, or even an allegation that Stikeman Elliott in any way facilitated the alleged 'fraud' or became a dupe or a conspirator with" Hardof Wolf.

Stikeman says it is necessary to demonstrate that the solicitor either facilitated the fraud or became a conspirator in the fraudulent act to establish an exception to solicitor-client privilege. "There is not even a hint in the trustee's reports that this was the case."


Risks: Bankruptcy, Fraud, Misrepresentations, Franchisor sells out, Mergers and acquisitions, Chapter 11, Solicitor-client privilege used to shield white-collar crime (self and others), Canada, United States, 20020116 Dylex trustee

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