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RESPONDING MOTION RECORD OF THE DEFENDANT_ ROBERT HRYNIAK

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RESPONDING MOTION RECORD OF THE DEFENDANT_ ROBERT HRYNIAK Powered By Docstoc
					                                                       Court File No.: 05-CV-300149 PD2

                                           ONTARIO

                              SUPERIOR COURT OF JUSTICE

BETWEEN:

                FRED MAULDIN, DAN MYERS, ROBERT BLOMBERG,
             THEODORE LANDKAMMER, LLOYD CHELLI, STEPHEN YEE,
        MARVIN CLEAIR, CAROLYN CLEAIR, RICHARD HANNA, DOUGLAS LAIRD,
                 CHARLES IVANS, LYN WHITE and ATHENA SMITH

                                                                                Plaintiffs

                                            - and-

                          CASSELS BROCK & BLACKWELL LLP,
                              GREGORY JACK PEEBLES,
                                and ROBERT HRYNIAK

                                                                             Defendants

      RESPONDING MOTION RECORD OF THE DEFENDANT, ROBERT HRYNIAK
                            (RETURNABLE MARCH 30, 2009)

                                                     LERNERS LLP
                                                     130 Adelaide Street West
                                                     Suite 2400
                                                     Toronto, ON M5H 3P5

                                                     D.H. Jack LSUC#: 14307Q
                                                     Jane Southren LSUC#: 39693G

                                                     Tel:   416-867-3076
                                                     Fax:   416-867 -9192

                                                     Solicitors for the Defendant, Robert
                                                     Hryniak
TO:         HEYDARY HAMILTON PC
            Barristers and Solicitors
            439 University Avenue
            Suite 1200
            Toronto, ON M5G 1Y8

            Natasha Bone
            Tel: 416-972-9001
            Fax: 416-972-9940

            Solicitors for the Plaintiff
                                        -2-



AND TO:   STOCKWOODS LLP
          150 King Street West
          Suite 2512
          Toronto, ON M5H 1J9

          Paul Le Vay
          Luisa J. Ritacca

          Tel: 416-593-7200
          Fax: 416-593-9345

          Solicitors for the Defendant, Cassels Brock & Blackwell LLP
INDEX
                                                                 Court File No.: 05-CV-300149 PD2

                                               ONTARIO

                                   SUPERIOR COURT OF JUSTICE

BETWEEN:

                    FRED MAULDIN, DAN MYERS, ROBERT BLOMBERG,
                 THEODORE LANDKAMMER, LLOYD CHELL!, STEPHEN YEE,
            MARVIN CLEAIR, CAROLYN CLEAIR, RICHARD HANNA, DOUGLAS LAIRD,
                     CHARLES IVANS, LYN WHITE and ATHENA SMITH

                                                                                         Plaintiffs

                                                 - and-

                               CASSELS BROCK & BLACKWELL LLP,
                                   GREGORY JACK PEEBLES,
                                     and ROBERT HRYNIAK

                                                                                      Defendants

                                                 INDEX

TAB NO.

1.          Affidavit of Robert Hryniak, sworn January 6, 2009

            A.     Schedule A-Cast of Characters



1269S7I.l
TAB 1
                                                       Court File No.: 05-CV-300149 PD2

                                        ONTARIO

                            SUPERIOR COURT OF JUSTICE


BETWEEN:

             FRED MAULDIN, DAN MYERS, ROBERT BLOMBERG,
          THEODORE LANDKAMMER, LLOYDCHELLI, STEPHEN YEE,
     MARVIN CLEAIR, CAROLYN CLEAIR, RICHARD HANNA, DOUGLAS LAIRD,
              CHARLES IVANS, LYN WHITE and ATHENA SMITH

                                                                                  Plaintiffs

                                          - and-

                          CASSELS BROCK & BLACKWELL LLP,
                              GREGORY JACK PEEBLES,
                                and ROBERT HRYNIAK

                                                                               Defendants

                            AFFIDAVIT OF ROBERT HRYNIAK

       I, Robert Hryniak of the City of Toronto, in the Province of Ontario, MAKE OATH.
AND SAY AS FOLLOWS:.


1.     I am a defendant in this action and have direct knowledge of the matters to which
I hereinafter depose. Where the facts to which I attest to are based on information and
belief I have so stated, identified the source of the information and confirm that I believe
those facts to be true.


OVERVIEW OF THIS AFFIDAVIT

2.     This affidavit is delivered in response to the summary judgment motion being
advanced against me by the plaintiffs, and in particular in response to the affidavit of
Fred Mauldin. filed in support of the plaintiffs motion.    I have sworn this affidavit to
address the essential facts that I rely upon in my defence and to demonstrate to the
Court why this is not an appropriate case for summary judgment as against myself.
                                             -2-


3.     For convenience, I have prepared and attached a Cast of Characters as
Schedule A hereto which sets forth a description of all of the entities that have
involvement .in the matters giving rise to this lawsuit, whether or not they are parties to
t~e action.   Capitalized terms in this affidavit have the same meaning ascribed to them
as in the Cast of Characters.


4.     I have also provided with this affidavit an Appendix of documents which is
marked collectively as Exhibit 1 to-my affidavit. All of the documents in Exhibit 1 have
been reviewed by me and all are true copies of what they purport to be. When any
document included in Exhibit 1 is referred to in this affidavit I will cite it by reference to
Exhibit 1 and its particular tab number.


THE ESSENTIAL FACTS RELATING TO THE PLAINTIFFS' CLAIM

5.     The thrust of the Plaintiffs' case against me appears to be their assertion that the
Tropos Joint Venture was a fraudulent scheme developed by me with the intention of
deceiving investors such as the Plaintiffs into investing and then of making off with the
funds. I deny these allegations.


6.     There are six essential factual issues that I will rely upon in to defend the
Plaintiffs' claims, each of which I propose to put forward at the trial of this action:

       1.      The Tropos Joint Venture was an entirely legitimate commercial
               transaction, not a fraudulent scheme of any sort;

       2.      The Plairitiffs did not invest in the Tropos Joint Venture;

       3.      Mauldin suffered no loss;

       4.      Mauldin's testimony with regard to the Plaintiffs' claims is wrong;

       5.       Peebles misconducted himself and made misleading and
                inconsistent statements which were not in any way authorized by
              . myself or Tropos; and

       6.      I am not liable for the Plaintiffs' alleged losses.
                                              -3-


THE EVIDENCE RELATING TO EACH ESSENTIAL FACTUAL ISSUE

       1.     The Tropos Joint Venture was an entirely legitimate commercial
              transaction, not a fraudulent scheme of any sort

7.     In support of their position that the Tropos Joint Venture was a fraudulent
scheme, counsel for the Plaintiffs has provided a report from Professor James Byme
opining on the validity of the basis trading programme proposed for the Tropos Joint
Venture. I note that Professor Byrne has not sworn to his report, and thus will not be
subject to cross-examination on the pending motion for summary judgment.

              Ref:   Report of Professor James E. Byrne, dated February 22, 2007,
                     Affidavit of Fred Mauldin, sworn October 28, 2008,Motion Record,
                     Tab 2 ("Mauldin Affidavit), Exhibit "T" .

8.     I disagree with Professor Byrne's conclusions. The Byrne report appears to be
based on facts that bear little or no resemblance to the facts of this case. In any event,
the Byrne conclusions appear to have been reached after a review of joint venture
documents relating to a purported Frontline Joint Venture, entered into by Bruno
Appliance and Furniture, Inc. ("Bruno Furniture") (not the Plaintiffs in this action) and
produced in separate litigation commenced by Bruno Furniture. The Byrne report was
not based on a review of the Tropos Joint Venture Documents or even Mauldin's
FrontHne Joint Venture Documents, as hereinafter defined, and is of no assistance to
the Court in the present case.

              Ref:   Report of Professor James E. Byrne, dated February 22, 2007,
                     Mauldin Affidavit, Exhibit "T"

9.     Regardless, in order to respond to the assertion that the Tropos Joint Venture
was a fraudulent scheme, and to assist the Court,1 have set out below a description of
basis trading, and how this trading concept was to be applied in the context of the
Tropos Joint Venture, which description will be presented in greater detail at trial.

              (a)    Basis Trading

10.    Tropos Financial is an investment company engaged in value-based position
trading in metals, equities and bonds. It employs a well known and widely used
arbitrage strategy known as "basis trading," or "cash and carry" trading. I myself have
been familiar with such trading for many years.
                                              -4-


11.    The word "basis" in this context refers to the difference that exists at any given
time between the cost of acquiring a particular asset and the future value of that asset.
If an investor were to buy a security such as a bond at a price less than its face value,
and subsequently were to sell the bond either at its face value or at a premium, the
"basis" or profit thereby realized would be equal to the difference between the purchase
price (plus associated fees and costs, known as "costs of carry") and the price received
upon sale.

              Ref:   Definition of Basis Trading Facility, Dresner Kleinwort Website
                     pages entitled "Glossary", Exhibit 1, Tab 1

12.    An example of basis trading in the commodities market would be where an
investor buys a commodity such as wheat, and at the same time sells a futures contract
which promises to deliver the same amount of wheat at a future date. This transaction
will eam a profit as long as the cash price paid for the wheat, plus associated costs is
less than the amount received for selling the futures contract.

13.    Basis trading is a widely-recognized and legitimate practice that is carried on in
various market sectors and deals with various types of securities, including both bonds
and commodities.      Hedge funds and investments companies dealing in currency
markets, of which there are many, are for this reason said to be engaged in the "cash
and carry trade."

              Ref:   Description of "Cash and Carry trade",     Montreal   Exchange
                     Website, Exhibit 1, Tab 2

14.    It is a well known practice among some money managers to seek to increase
potential profits on basis trades by borrowing, to the maximum extent possible, against
cash on hand. An ordinary brokerage account might permit the holder to borrow up to
ten times the ca·sh value in the account. Many hedge funds leverage at a 20:1 ratio, and
in some cases as high as a 40:1 ratio, which in the latter case means that for every
dollar of cash on hand there is a corresponding debt of $40 to finance the transaction.
While the level of potential profit increases as the cash-to-debt ratio increases, so does
the risk. The current financial crisis illustrates the risks associated with excessive
leveraging.
                                               -5-


15.    More conservative investors may engage in basis trading on a "non-depletion"
basis, meaning that the cash on hand is not leveraged at all, and the price paid for the
security purchased with that cash is less than the par value of the security. An investor
wishing to conduct trades on a "non-depletion" basis in the bond market, for example,
would ensure that the price paid for the bond is less than its maturity value. Because the
redemption of the bond is an absolute obligation of the issuer that is subject only to the
passage of time, and assuming the solvency of the issuer, which Tropos always chose
with care, there is minimal risk to the capital employed in a "non-depletion" trade.

16.    Tropos's model was based on this more conservative approach. While it is not
possible to eliminate risk entirely, Tropos restricted its trades to securities that were
highly rated, such as blocks of debt instruments issued by large intemational banks, the
United States government and other qualified issuers, in order to ensure that the overall
risk to capital was kept low.

              Ref:   Anatomy of the Medium Term Note Market, Federal Reserve
                     Bulletin, Volume 79, Number 8, August 1993, Exhibit 1, Tab 3

              (b)    The Tropos Joint Venture

17.    I sought to establish the Tropos Joint Venture as a means of raising a block of
capital in the amount of USD$10 million for use in basis trading, which was the
appropriate amount to enable Tropos Financial to buy and sell securities profitably.

18.    The documents prepared to facilitate the Tropos Joint Venture (the "Tropos Joint
Venture Documents") provided that the funds would be used to purchase only "bank
issued senior debt instruments" on a "non-capital depletion basis," in order to ensure
that the funds would be held as cash or used to purchase suitable instruments with an
equivalent value, and therefore reduce to the extent possible the risk to investors'
capital.

              Ref:   Draft Tropos Joint Venture Documents, dated July, 2001, Exhibit 1,
                     Tab4

                     Tropos Capital Inc., Executive Summary, Exhibit 1, Tab 5

19.    Through arrangements made by me with Peebles, .investments in the Tropos
Joint Venture were to be made through Cassels Brock's trust account. Upon deciding
                                           -6-


to participate in the Tropos Joint Venture, and after being accepted by me, investors
were to provide their funds to Cassels Brock in trust.       Peebles was to prepare a
certificate evidencing the investor's participation in the Joint Venture, I would sign the
certificate, and Cassels Brock would then release the funds from the trust account to
Tropos to finance trades. Peebles was responsible for ensuring that each investor
received a copy of its certificate.

              (c)     The Deutsche Bank Instruments and NSB

20.    In or about September, 2001, I came into contact with Ole Spaten of Aro Motor
Corporation CAMC"). AMC was in the business of importing foreign cars into the United
States, and appeared to be a completely legitimate operation. Through Mr. Spaten I
leamed about certain securities (the "DBF Bonds") issued by Deutsche Bank Finance
N.V., a very large international bank, which ANlC had available for sale and which were
located at New Savings Bank A.D. ("NSB") in Montenegro. After some research, I
determined that the most efficient manner of acquiring and reselling the DBF Bonds
would be to establish both banking and brokerage accounts at NSB. I therefore asked
Peebles to conduct a check on NSB and Mr. Spaten and requested that AMC confirm
with HSBC, with whom I banked, that the DBF Bonds were in fact on deposit at NSB. In
addition, I asked HSBC to obtain prices for the DBF Bonds so that I could determine the
advisability of trading in them. My investigations in this regard confirmed that NBS and
Spaten appeared to be legitimate and that there was a sufficient market in DBF Bonds
                                                    -7-


 to make them an appropriate investment for this trading strategy.

                   Ref:   Leiter from Denise Dwyer, NSB, to C. Begie, HSBC, dated
                          November 1, 2001, Exhibit 1, Tab 8

                          Stock Quote re DBF Bonds, Bloomberg Professional, dated
                          November 7,2001, Exhibit 1, Tab 9

                          Due Diligence Research Results conducted by Cassels Brock on
                          NSB, Exhibit 1, Tab 6

                          Cassels. Brock Account, dated December 31, 2001, entry dated
                          November 14,2001, page 7, Exhibit 1, Tab 10

                          Due Diligence Research Results, conducted by Cassels Brock on
                          Ole Spaten, Exhibit 1, Tab 7

                   (d)    The Investments

 21.     Between June and December 2001, Tropos raised approximately USD $10.2
 million for the Joint Venture. These funds came from five investors. Frontline, in which
. up until November, 2001 Cranston' was involved, was one such investor. After being
 received into Cassels Brock's trust account, the funds were transferred to NSB. The
 final transfer of capital to NSB took place on December 17, 2001 and, as of the end of
 December 2001, Tropos had a total of USD $10,210,360.01 on account at NSB. My
 contact there was Denise Dwyer, who was International Director of NSB.

                   Ref:   NSB Statements of Aecoun~ Various Dates, Exhibit 1, Tab 11

 22.     Having raised the intended block of approximately $10 million for the Tropos
 Joint Venture, Tropos ceased accepting further subscriptions in or about late December
 2001.

                   Ref:   Leiter to Tropos Investors from R. Hryniak, dated January 21, 2002,
                          Exhibit 1, Tab 12

 23.         In December 2001, Tropos conducted a test trade to determine whether it would
 be viable to carry on trades through NSB on a long-term basis. By fax dated December
 1.3, 2001, I instructed Ms. Dwyer:

       (i)         to effect the purchase by Tropos of DBF Bonds with a face amount of
                   USD$5,000,000 by crediting to AMC's NSB account from Tropos' NSB
                   account the amount of USD$4,950,000 and delivering the DBF Bonds to
                   Tropos's account; and
                                                 -8-


      (ii)     to sell the DBF Bonds at the best available price at retail (providing the
               selling price is in excess of [the] face value of the DBF Bonds), and to
               deposit the proceeds from the sale back into Tropos's account.

               Ref:   Fax from Hryniak to Denise Dwyer, dated December 13, 2001,
                      Exhibit 1, Tab 13

                      Fax from AMC to Denise Dwyer, dated December 13, 2001, Exhibit
                      1, Tab14

                      Invoice from AMC to Tropos, dated December 13, 2001, Exhibit 1,
                      Tab 15

24.      By fax dated December 14, 2001, Ms Dwyer confirmed my instructions and
informed me that the order had been effected that day. The DBF Bonds were sold on
December 17, 2001 for USD$5, 197,500, yielding a net return of 3.9%.

               Ref:   Fax from Denise Dwyer to Hryniak, dated December 14, 2001,
                      Exhibit 1, Tab 16

                      NSB Statements of Account [Transaction Report 11/06101           -
                      12/31/01 entry, dated December 17, 2001], Exhibit 1, Tab 11

                      Letter to Tropos Investors from R. Hryniak, dated January 21, 2002,
                      Exhibit 1, Tab 12

               (e)    The Attempts to Recover the Money

25.      Unfortunately, other than the test trade, Tropos was not never able to carry
through the proposed trading model because the TroposJoint Venture Funds, which
had been put on deposit with NSB, were taken by Pribble. I learned this after spending
several months attempting to get NSB to execute its contract with Tropos and ,getting no
response. Ultimately I pressed Ms Dwyer for the reason that NSB was not responding.
After she unsuccessfully attempted to locate and get a response from Pribble, I
cancelled the agreement and demanded the return of the funds. When the funds were
not returned I spoke to Ms Dwyer by phone and she told me, and I believe, that Pribble
                                               -9-


had closed the Tropos account and made off with the funds.

             Ref:   Em.ail from Hryniak to Denise Dwyer, dated June 19, 2002, Exhibit
                    1, Tab 17

                    Fax from Hryniak to Denise Dwyer, dated June 25, 2002, Exhibit 1,
                    Tab 18

                    Email from Hryniak to Denise Dwyer, dated June 27, 2002, Exhibit
                    1, Tab 19

                    Fax from Denise Dwyer to Hryniak, dated April 17, 2003, Exhibit 1,
                    Tab 20

26.   Thereafter, I tried to recover the investors' funds from Pribble. The steps I took
included notifying the FBI, because Pribble is a U.S. citizen and I had located him in
Florida. Unfortunately, recovery of the funds proved impossible.

             Ref:   Fax to Mark Pinto, FBI, dated September 17,2003, Exhibit 1, Tab 21

                    Leiter to Tropos Investors from R. Hryniak, dated July 25, 2002,
                    Exhibit 1, Tab 22

                    Leiter to R. Fornelli from R. Hryniak, dated August 28, 2003, Exhibit
                    1, Tab23

                    Letter to Attorney General of Ontario from G. Peebles, dated May
                    14,2004, Exhibit 1, Tab 24

                    Letter to Financial Services Commission from G. Peebles, dated
                    July 13, 2004, Exhibit 1, Tab 25

27.   Contrary to the Plaintiffs' assertions, I was never notified by any law enforcement
authority, or anyone else that any investigation was being undertaken into my activities
or those of my companies in relation to the Tropos Joint Venture, nor do I believe that
any such investigation was undertaken, nor was it ever suggested that I had been guilty
of any wrongdoing in connection with the disappearance of the funds at NSB.

28.   Cranston, however, was prosecuted in Canada on charges of tax evasion, and I
was subpoenaed to be a witness for the prosecutor. Cranston pleaded guilty to some
aspect of the charges made against him (particulars were not provided to me) and was
sentenced to prison. The testimony that I was being asked to give related, among other
things, to Cranston making inappropriate withdrawals from funds purportedly held in
                                              - 10-


trust by Cassels Brock on behalf of Tropos.

              Ref:    Subpoena, dated January 3, 2007 and Will Say of Robert Hryniak,
                      Exhibit 1, rab 26

              (f)     eRA Audit

29.   The Tropos Joint Venture was reviewed in detail by the Canada Revenue
Agency ("CRA") in the course of its audit of Tropos Capital Inc. in relation to the 2001 -
2006 taxation years." Tropos Capital had sought to claim non-capital losses in its tax
retums for those years.         The audit conducted by the CRA was extensive, and
included an analysis of Tropos's investment model. Tropos cooperated fully with the
audit and provided access to all pertinent information, the Tropos Joint Venture
Documents and its records from Cassels Brock, and in addition answered all of the
CRA's inquires. The CRA ultimately concurred in my view that Cranston and Pribble
had fraudulently misappropriated investors' funds, but disallowed Tropos' deduction of
non-capital losses on the basis that losses resulting from fraud were non-deductible.
The CRA also concluded that Tropos was not entitled to the deductions claimed
because beneficial ownership of the funds was with the investors, not Tropos.

              Ref:    Letter from Steve Esseltine, Enforcement Division,· eRA, dated
                      December 1, 2008, Exhibit 1, Tab 27

              (g)     The Pike Letter

30.    In support of its position that the investment model contemplated for the Tropos
Joint Venture was fraudulent, the Plaintiffs rely on a letter to John Willock from Stephen
Pike, dated June 21, 2001, in which Mr. Pike attached an article published by the
Ontario Securities Commission .

             . Ref:   Letter from Stephen A. Pike to John Willock dated June 21, 2001
                      with attached articled published by the OSC, dated November 14,
                      2000, Exhibit 1, rab 28


31.   I concur with Mr. Mauldin's testimony on the point thatMr. Pike had little
experience in securities and offshore investment and limited exposure to the trading
strategy. I also draw attention to the fact that we have no way of knowing whether Mr.
Pike was looking at Tropos Joint Venture Documents, at some version of Frontline joint
venture documents, or at other investments entirely in making this assessment.
                                                - 11 -


 32.    Moreover, when I spoke with Mr. Pike, which I did in or about June, 2001, he did
 not ask any questions or give any indication of any problems that he had with the basis
trading concept. All he wanted was an overview of the investment strategy.

 33.    Given that Mr. Pike was not in a position to assess the strategy, he did the
 prudent thing that lawyers tend to do, and pointed out to his client possible risks that he
thought might exist in such trading.

 34.    In any event, John Willock did not meet the criteria that I demanded of investors
 in the Tropos Joint Venture and would not have been accepted by me as an investor in
the Tropos Joint Venture. I leamed after our discussions that he had, after receiving Mr.
 Pike's letter, invested in Frontline, through his company Paradise Group Holdings, Inc.
 It is my understanding that Frontline redeemed John Willock's investment in Frontline at
 his request.

                Ref:   Email from R. Fornelli to R. Hryniak, dated November 6, 2008,
                       Exhibit 1, Tab 29

                (h)    The Siopen Letter

 35.    In support of their position that the investment model contemplated for the
Tropos Joint Venture was fraudulent, the Plaintiffs also rely upon a letter from Jeffrey M.
 Siopen, dated August 7, 2001, to Lome Saltman at Cassels Brock in which Mr. Siopen
 attached an article published by the US Department of Treasury.

                Ref:   Letter from J. Slopen to L. Saltman, dated August 7, 2001, Mauldin
                       Affidavit, Exhibit "V"


 36.     spoke to Mr. Siopen after he sent this letter and described to him the basis
trading model that I was using.          Mr. Siopen accepted my explanation, and I heard
. nothing further on the subject from Mr. Siopen.
                                             - 12 - .


       2.     The Plaintiffs did not invest in the Tropos Joint Venture.

              (a)         Tropos had no contractual relationship with Mauldin

                    (i)     Mauldin's Relationship was with Cranston and the
                            investment he was considering was an investment in
                            Frontline

37.    As Mauldin has admitted, his dealings in relation to the investment funds that he
now seeks to recover from me were with Cranston, who was at the time a principal of
Frontline, not with me or Tropos.

38.    I met with Mauldin, Peebles and Cranston on June 19, 2001. Mauldin told me at
that meeting that he was looking at a number of investment options, one of which was
the investment in Frontline being proposed by Cranston. I took from that statement that
Mauldin was considering taking an equity position· in Frontline in furtherance of
Cranston's efforts to raise equity financing in Frontline in order to fund an investment by
Frontline in the Tropos Joint Venture.

39.    I recall Mauldin saying that he had wanted to meet me in order to determine
whether what Cranston had told him about Frontline investing in the Tropos Joint
Venture was correct and whether he would be comfortable with his proposed
investment in Frontline. Mauldin stated, and I believe, that he had no agreement with
Frontline at that time, but that he would, if he determined that he was going to invest in
Frontline, negotiate an agreement with Frontline on terms and conditions that were
satisfactory to him at a later date.

40.    I told Mauldin about myself and about the Tropos Joint Venture, including a brief
description of the concept of basis trading. Mauldin told me that he was a retired house
builder, but that he was a sophisticated investor with the capacity to understand
financial transactions. He also told me that the money he was proposing to invest was
earned in his construction business, and that he was acting on his own behalf and not in
partnership with anyone else.

41.    Neither Peebles nor I said that the funds invested would be deposited in any·
"non-depletion interest bearing trust account" as Mauldin now asserts.      I n any event,
                                            - 13 -


Mauldin seems to have misconstrued the "non-depletion" concept as described to him in
the course of our meeting, As outlined above, as I .described to Mauldin at our meeting,
and as I have said in every meeting that I have had in which I described the Tropos
Joint Venture, I proposed to use funds on a non-capital depletion basis, This meant that
I proposed to invest the funds in such a manner as not to deplete the face amount of the
investment, and to ensure that when we purchased a bond, the par value or value at
maturity was greater than tile purchase price, nor was the investment to be leveraged,
If there were to develop a liquidity problem and we could not sell the bond, full value
would eventually be realized by redemption by the issuer of the bond, This strategy was
adopted in order to provide protection against loss of investment capital.

42,    As I also did in every meeting I had with anyone in which I described the Tropos
Joint Venture, I described to Mauldin the risks associated with investments, including
this one, which risks included credit risk, liquidity risk, systemic risk and the risk of
human error. While I tried to structure the Tropos Joint Venture in such a way as to
reduce risk as much as possible, it is impossible to remove it altogether.

43,    Throughout the meeting, Mauldin repeatedly mentioned that the retums
described to him by Cranston were significantly better than that which I was describing,
At paragraph 6 of 'his affidavit, Mauldin describes the investment opportunity which
Cranston, not I, was proposing, Mauldin's description speaks of generating a rate of
return in the area of 144% to 240% annually from an investment of $1,000,000, This
description is totally inconsistent with the activities of the Tropos Joint Venture, and was
never given to Mauldin by me or anyone else on behalf of Tropos,

44,    In any event, I explained at our meeting that the kinds of returns Mauldin was
looking for could only be achieved if the funds invested were highly leveraged, which
was a more aggressive approach than I was comfortable with or that I was planning on
using .in the Tropos Joint Venture, As I said to Mauldin, the concept of leveraging is
directly contrary to the concept of preservation of capital.

45,    During the course of our meeting, Mauldin asked me if he could invest directly in
the Tropos Joint Venture,
                                           - 14 -


46.    I told him that I would not consider him as a direct investor in the Tropos Joint
Venture until I knew him better and he had established to my satisfaction that he met
the criteria that I had generated for investors in the Tropos Joint Venture. These criteria
included that he:

       a)     be an American citizen;


       b)     be a sophisticated investor; and


       c)     have a verifiable individual net worth, or joint net worth with his spouse,
              that exceeded US$1,000,000, have an individual income in excess of
              US$200,000 in each of the previous two calendar years, or have a joint
              income with his spouse in excess of US$300,000 in each of those two
              years.

47.    I also told Mauldin at our meeting that I would provide him with a complete list of
the criteria if he were serious about investing in the Tropos Joint Venture, was willing to
spend the time it would l<3ke for me to get to know him sufficiently to feel comfortable
with him as an investor, and was willing arid able to provide me a complete history of
the funds that he proposed to invest so that I could confirm that they were in fact owned
by him.

48.    At the end of our meeting, I was under the clear impression that Mauldin was not
prepared to provide me with the information that I needed, as outlined above. He said
that he would decide if he were prepared to invest in Frontline and, if so, he would see if
he could negotiate terms with Frontline that were satisfactory to him.

49.    After the meeting ended I said to Peebles that if Mauldin had taken seriously
what I told him, I doubted that he would invest in Frontline either because he would.be
unlikely to achieve the very high returns that he seemed to be looking for.

50.    I do not remember anyone else attending our meeting, and in particular I do not
have any recollection of Dan Myers being in attendance although there was another
person present. That person did not identify himself as Dan Myers, and I do not recall
                                                  - 15 -


him saying anything.         Certainly there was no indication given that the funds which
Mauldin proposed to invest belonged to any person other than Mauldin.

                 (ii)        The documents governing the investment by Mauldin were
                             Mauldin's Frontline Joint Venture Documents, not Tropos
                             Joint Venture Documents

                        A.      Mauldin signed Frontline documents and received
                                Frontline joint venture certificates and Frontline updates

51.    Mauldin has testified that he received documents from Cranston relating to the
investment being proposed by Cranston before meeting with me. As Mauldin has not
produced a complete set of the documents that he signed, I have included in Exhibit 1 a
complete package of the documents that Mauldin signed in entering into the Frontline
Joint Venture ("Mauldin's Frontline Joint Venture Documents"), which I received from
Fornelli on December 7, 2005. I understand that the package of material. Fornelli sent
me which included Mauldin's Frontline Joint Venture documents, constituted the entirety
of Frontline's file with regard to Mauldin's investment.

              Ref:      Mauldin's Frontline Joint Venture Documents, received December
                        7,2005, Exhibit 1, Tab30


52.    There appear to be two sets of documents signed by Mauldin, the first in early
June 2001, and the second in late July 2001. The documents signed in early June
appear to be the documents that Mauldin refers to as having been provided to him by
Cranston a couple of weeks before I met with him on June 19, 2001. The documents
signed by Mauldin in July 2001 appear to have been provided to him by Cranston after
Mauldin wired his funds (the "Mauldin Funds") into Cassels Brock's trust account, and
after Cranston signed the first Subscription Agreement in relation to Frontline's
investment in the Tropos Joint Venture.              In any event, I did not provide Mauldin's
Frontline Joint Venture Documents to him, nor did anyone else at Tropos.

              Ref:      Mauldin's Frontline Joint Venture Documents, Exhibit 1, Tab 30

                        Email from R. Cranston to F. Mauldin, dated July 25, 2001, Exhibit
                        1, Tab 31


53.   As will be dealt with in greater detail below, it appears to me that many of the
documents received by Mauldin were plagiarized by Cranston from Tropos's Joint
                                                  - 16 -


Venture Documents, possibly with the assistance of Peebles, blJt in any event, without
my knowledge, acquiescence or consent.                     Regardless, however, I am advised by
Fomelli, and I believe, that Frontline recognizes Mauldin's investment as valid and
enforceable. This too will be dealt with in.greater detail below.

               Ref:      Mauldin's Frontline Joint Ventu~e Documents, Exhibit 1, Tab 30

                         Draft Tropos Joint Venture Documents, Exhibit 1, Tab 4


54.    Mauldin's Frontline Joint Venture Documents form the basis of Mauldin's
investment, which was with Frontline, not Tropos. There are some characteristics of
these documents and others that Mauldin sent or received in relation to his investment,
that are of particular significance:

       (1)     On June 28,2001 Mauldin appears to have received a confirmation from
                   Cranston, on Frontline letterhead, that he had been accepted into the
                   private placement. This confirmation did not come from me or Tropos;


               Ref:      Letter from R. Cranston, Frontline, to F. Mauldin, dated June 28,
                         2001, Exhibit 1, Tab 32

       (2)     On July 5, 2001 Mauldin signed Profit Account Information forms
                   instructing Frontline where to transfer his profits to a company called
                   GREAT COMMISSION LTD.;


               Ref:     . Profit Account Information forms signed by F. Mauldin, dated July
                          5, 2001, Exhibit 1, Tab 33

       (3)     On July 30,2001 Mauldin signed two Subscription Agreements in relation
                   to his investments. One related to a $1,000,000 investment and the other
                   related to a $250,000 investment. In both cases:


              I.        the documents contemplated Mauldin personally subscribing for an
                        investment in Frontline, not Tropos; and

             II.        the documents did not contemplate the payments being made into
                        Cassels Brock's trust account, but rather to the "Trust/Holding
                        Account of the Corporation", the "Corporation" having been defined
                                            - 17 -


                 as Frontline. It therefore appears that Mauldin was given separate
                 instructions to deposit the Mauldin Funds into Cassels Brock's trust
                 account at some other time. He was not given such instructions by
                 me or Tropos;

(4)         Mauldin warranted that:

        I.        the information set forth in the Funds Ownership Declaration, in
                   which Mauldin certified that he had full and complete title to the
                   funds, was accurate;

       ii.        he had knowledge and experience to evaluate the risks of the
                   subscription;

      iii.        the joint venture interest being acquired was to Mauldin's own
                   account and he did contract, undertake or arrange with any person
                   or entity to grant participation with respect to his interest or with a
                   view to making any distribution of proceeds to any other person or
                   entity not identified to Frontline;

      IV.         the agreement was to be governed by the laws of the Republic of
                   Panama; and

      v.          by signing the agreement, Mauldin irrevocably consented and
                   agreed that any legal proceeding arising under or in connection
                   with the agreement was to be brought and maintained exclusive in
                   the Courts in the Republic of Panama; and

      vi.         Mauldin's share of the received net profits from the investment was
                   to be disbursed to Mauldin on a semi-monthly basis.

         Ref:     Mauldin's Frontline Joint Venture Dcouments, Exhibit 1, Tab 30




(5)      Mauldin appears to have received Certificates of Joint Venture Interest
         ("Certificates") confirming his subscription for a joint venture interest with
                                            - 18 -


        Frontline. One Certificate was issue for the $250,000 investment and one.
        for the $1,000,000. Both were dated July 31, 2001. Notable aspects of
        these documents include the following:

       I.         a requirement that any legal proceedings arising under or in
                  connection with the certificate were to be brought and maintained
                  exclusively in the Courts of the Republic of Panama; and

      II.         the only difference between the two Certificates was that the
                  Certificate in respect of the $250,000 investment contemplated that
                   Frontline would pay to Mauldin 50% of the profits realized on the
                  cash invested whereas the Certificate in respect of the $1,000,000
                   investment contemplated Frontline paying to Mauldin 98% of the
                  profits realized. It appears, therefore that at some point Mauldin
                  agreed to a lesser percentage return in relation to the $250,000
                   investment. In this regard, it is interesting to note that on July 14,
                  2004, Mauldin signed a Declaration in favour of Frontline agreeing
                  that the terms and conditions of his joint venture with Frontline
                  would continue as originally signed and that the agreed amount of
                   50% of the money earned would go to Frontline. This July 14,
                   2004 Declaration does not appear to be limited to the $250,000
                   investment. It appears then that even in 2004 Mauldin was still
                   negotiating with Frontline in respect of the terms of his investment
                  with Frontline. These negotiations did not involve me.

        Ref:      Mauldin's Frontline Joint Venture Documents, Exhibit 1, Tab 30

                  Declaration executed by F. Mauldin, dated July 14, 2004, Exhibit 1,
                  Tab 34


(6)         Mauldin states that he received Frontline Status Updates between July 30
            and November 2001 purporting to describe the status of the Frontline
            Joint Venture. It should be noted that:

      i.          these documents all appear to be on Frontline letterhead and
                  signed by Cranston;
                                     - 19 -


      ii.      with the exception of one page, described below, they do not
                mention Tropos and they do not name me as the source of any of
                the information in them;

      III.     Mauldin asserts that references to "the trader" are references to
                me. I was not "the trader," and I did not make any of the
                representations attributed to "the trader" that appear in these
                updates from Cranston and Frontline;

      IV.      Notwithstanding that he has alleged that he received status
                updates only until November 2001, Mauldin h.as also produced in
                his affidavit Frontline Status Update Memos from 2002. Once
                again, these documents are on Frontline letterhead and are signed
                by Cranston. They were not written by me or sent with my
                authority, consent, knowledge or acquiescence;

      v.       In any event, these documents generally do not reflect what was
                actually happening with regard to the Tropos Joint Venture at the
                times they were written. Cranston seems deliberately to have
                been misleading Mauldin;

      VI.      With the exception ofone page, which appears to be a plagiarized
                version of a letter I sent to the Tropos Joint Venture investors in
                January 2002, the contents of each status update do not bear any
                resemblance to what was actually happening with the Tropos Joint
                Venture around the time that the status updates were purportedly
                delivered. The plagiarized version of my letter was sent by
                Cranston without my knowledge, acquiescence or consent; and

(7)      As Mauldin has admitted, in February 2002 Frontline provided him with an
         account statement representing interest payments made on his
                                             - 20-


             investments.      Once again, this statement did not come from myself or
             Tropos.

             Re:    Frontline Status Update Memos, Mauldin Affidavit, Exhibit "P"

                    Account Statement from Frontline to Mauldin dated February 21,
                     2002, Exhibit 1, Tab 35


55.   The fact that Mauldin received and reviewed the foregoing documents indicates
to me that Mauldin knew that he was dealing with Frontline, not Tropos, and that he was
aware that he had invested in the Frontline Joint Venture, not the Tropos Joint Venture.

56.   The documents that Mauldin signed in June 2001 also include a Confidentiality
Agreement in favour of Rhino Holdings. This Confidentiality Agreement contemplates
the disclosure by Rhino Holdings of information relating to an investment strategy that it
was carrying out. As will be discussed in greater detail below, it appears to me that this
document was also plagiarized from the Tropos Joint Venture Documents, but in any
event, it appears that Mauldin was signing a Confidentiality Agreement given to him by
Cranston in favour of Rhino Holdings, not Tropos, and that the document did not
mention Tropos or me at all.

                    B.      Mauldin's Frontline Joint Venture Documents appear to
                            be plagiarized

57.    Mauldin's Frontline Joint Venture Documents appear to have been plagiarized
from the Tropos Joint Venture Documents.             This was done without my knowledge,
authority, acquiescence or consent.

58.    It is not clear to me, as between Peebles and Cranston, who exactly plagiarized
these documents. However, what is clear is that it was as sloppy job. As described
above, there were two tranches of documents signed by Mauldin, the first in June 2001,
and the second in July 2001. The Confidentiality Agreement included in the first tranche
of documents was in favour of Rhino whereas a Subscription Agreement relating to a
"Demand Note", the Letter of Interest, two Profit Account Information Forms (which
identify two different banks) and the Authorization to Verify and Authenticate that appear
to have formed part of the same package of documents mentioned Tropos or me. I did
not provide any documents relating to the Tropos Joint Venture to Mauldin, nor did I
                                               - 21 -


authorize Cranston or Peebles to do so. Moreover, the documents that mention me or
Tropos do not reflect the actual terms of the Tropos Joint Venture. It is also interesting
to note that these documents were all in the possession of, and produced by Cassels
Brock in this action.

               Re:      Package of documents executed by Mauldin in early June, 2001,
                        Exhibit 1, Tab 36


59.    It therefore appears to me that Cranston, with some assistance from Peebles,
copied some of the documents included in the Tropos Joint Venture Documents and
changed them so that they related to a joint venture that Cranston intended to run
through one of his corporations, but without paying sufficient attention to remove all of
the references to me or to Tropos.

60.    The second tranche of documents included in Mauldin's Frontline Joint Venture
Documents was signed and delivered in July 2001                     and included Subscription
Agreements and the Certificates of Joint Venture Interest that Cranston provided to
Mauldin.   These documents appear to be similar to the version of the Tropos Joint
Venture Documents that was being used around that time.                     The only significant
differences appear to be that:

             (i)        the choice of law/choice of forum provision in the Subscription
                        Agreements and Certificates in Mauldin's Frontline Joint Venture
                        Document identified the Republic of Panama as the applicable law
                        and jurisdiction, whereas the Tropos Joint Venture Documents
                        identified Barbados; and

            (ii)        In Mauldin's Frontline Joint Venture Documents, the corporation
                        was identified as Frontline, whereas in the Tropos Joint Venture
                        Documents the corporation was identified as Tropos.


61.    It would have been a relatively simply matter for Cranston to have plagiarized the
Tropos Joint Venture Documents and sent them to Mauldin, late in July 2001, because
by then Cranston had already signed the Tropos Joint Venture Documents on behalf of
                                              - 22-


Frontline, and had copies of them.

              Re:   Tropos Joint Venture Documents executed by R. Cranston on
                    behalf of Frontline in July, 2001, Exhibit 1, Tab 37

                    Email from Cranston to Mauldin, Exhibit "P"; Mauldin Affidavit


62.    In addition to plagiarizing the Tropos Joint Venture Documents, it appears that
Cranston and/or Peebles also plagiarized or, at a minimum, amended and disseminated
letters or documents that I had sent to T ropos Joint Venture investors reporting to them
on this status of the Tropos Joint Venture. In one example, Mauldin has attached as a
part of Exhibit "P" to his affidavit a document, dated January 19, 2002, which contains a
verbatim reproduction of the leiter that I sent to the Tropos Joint Venture investors on
January 21, 2002. It appears that Cranston must have received a draft of my letter from
Peebles before I sent it out to the Tropos Joint Venture investors and sent it out to
Mauldin, and probably others, without letterhead or a signature.               It is not clear when
Mauldin received this document, but regardless it was sent to him by Cranston without
my knowledge, authority, acquiescence or consent.

             Ref:   Untitled memo dated January 19, 2002, Mauldin Affidavit, Exhibit
                    "P"

                    Letter to Tropos Investors from R. Hryniak, dated January 21, 2002,
                    Exhibit 1, Tab 12


                    c.      Frontline Recognized the Mauldin investment in
                            Frontline as Valid

63.    Despite the fact that Mauldin's Frontline Joint Venture Documents appear to me
to have been plagiarized by Cranston and/or Peebles, Frontline, through Fornelli, has
taken the position that Mauldin is a valid investor in Frontline and Frontline has
recognized Mauldin's investment as legitimate.

64.    In the summer of 2003, when I learned that there were problems with the manner
in which Peebles was handling trust funds, and I began attempting to calculate the
monetary value of Frontline's investment in the Tropos Joint Venture, Fornelli told me
that he recognized Mauldin as an investor and had included the Mauldin Funds which
had been deposited into Cassels Brock's trust account in Frontline's calculation of the
                                              - 23-


Mauldin investment in Frontline.

              Ref:   Email from Fornelli to Hryniak, dated November 6, 2008, Exhibit 1,
                     Tab 29


65.    As set out in the Tropos Joint Venture Documents, Frontline invested in the
Tropos Joint Venture as a principal, not as an agent for its investors. Fornelli confirmed
to me in 2003 his understanding of this fact.         Furthermore, in 2004 Fornelli signed a
further Funds Ownership Declaration on behalf of Frontline in relation to the $4.6 million
that we had confirmed together had been invested by Frontline in the Tropos Joint
Venture. If Mauldin and the other Plaintiffs had a problem with how Frontline invested
its funds, one would have expected that they would have taken the problem up with
Frontline, but they have not.

                     D,      Mauldin was not entitled to invest the Mauldin Funds
                             whether in the Frontline Joint Venture or the Tropos
                             Joint Venture'

66.    In any event, Mauldin's investment was contrary to the terms of the Funds
Ownership Declaration that he executed with regard to the Frontline Joint Venture. In
that declaration, which mirrors the declaration that he would have had to execute had
he been accepted as an investor in the Tropos Joint Venture, Mauldin certified that the
Mauldin Funds were his, and that he had complete legal title and authority to commit the
funds. He further certified that there were no liens or commercial obligations affecting
the funds.

              Ref:   Funds Ownership Declaration, Mauldin Affidavit, Exhibit "8"


67.    In fact, as Mauldin now characterizes the investment in his affidavit, the funds
were owned by a number of people, and only a very small portion of the Mauldin Funds
were owned by Mauldin himself.

68.    Mauldin's investment therefore appears to have been contrary to the terms of the
Funds Ownership Declaration that he signed.              As I understand it, this is important
because his delivery of those funds appears to have breached US laws and regulations
relating to the transfer of money on behalf of others. At trial, it is my intention to adduce
evidence of the US law and regulations which Mauldin appears to have breached both
                                                 - 24-


in entering into the Frontline Joint Venture on behalf of, or as agent for the rest of the
Plaintiffs, and with regard to the manner in which Mauldin collected funds from the other
Plaintiffs and delivered them to Cassels Brock's trust account. The provisions of US law
upon which I propose to rely at trial are set forth at Tab 37 to Exhibit 1.

               Ref:   US Code Title 31 , S. 5312, 5324 and 5330, Exhibit 1, Tab 38


                      E.      Mauldin invested $1,200,000 in Frontline and $50,000 in
                              Rhino

69.     Mauldin's Frontline Joint Venture Documents contemplate the investment of
$1,250,000 in the Frontline Joint Venture. However, the Mauldin Funds deposited in the
Cassels Brock's trust account amounted to only $1,200,000.

               Ref:   Cassels Brock's Trust Account Ledgers, page 8, Exhibit 1, Tab 39


70.    . Given that on July 5, 2001, Mauldin executed a Profit Account Information Form
relating to an investment of $1,250,000, one would have thought that he would have
had the funds to meet that commitment. It appears, however, that he had to scramble
to come up with the last $50,000 which, as he testified to in his affidavit, he did by
inducing one of the other Plaintiffs, Charles Ivans, to provide it on July 18, 2001.
Mauldin does not, in his affidavit, provide any information relating to the deposit of these
funds. I have, therefore, included in Exhibit 1 the documents relating to that deposit that
Mauldin provided to me in 2003 when I was investigating the problems that I had
discovered in relation to how Peebles was handling matters in the Cassels Brock trust
account.

               Ref:   Documents relating to the $50,000 deposit, Exhibit 1, Tab 40


71.     It is clear from the information that Mauldin provided in relation to the $50,000
amount that he wired the $50,000 directly to a Rhino bank account on Cranston's
instructions, not to Cassels Brock. Mauldin made the deposit in this way despite the
fact that:

              i.      a month earlier, he had forwarded the Mauldin Funds to Cassels
                       Brock in Trust; and
                                                        - 25-


             ii.              he now asserts that part of what induced him to invest the Maudlin
                               Funds in the first place was his understanding that the investment
                              was being supported by Cassels Brock.                    In any event, Mauldin
                               certainly was not told by me or Tropos how to send in his funds.
                              That was something which was entirely between Mauldin and
                               Frontline, and directed by Cranston.

               Ref:           Email from R. Cranston toF. Mauldin, dated June 28, 2001, Mauldin
                              Affidavit, Exhibit "D"


72.    In the discussions I had with Fornelli in which we attempted to reconcile the
investments that had been made into Frontline and the investments that Frontline had'
made into the Tropos Joint Venture, we were unable to account for this $50,000
amount. It appears that Cranston may simply have kept it for himself. In any event, it
was not given to me or to Tropos.

                      (iii)      Mauldin's Funds Were Held in Cassels Brock's Trust
                                 Account under a Cranston Client Number (OitoMundus)

73.    I was not aware at the time of what Peebles was doing with funds deposited in
Cassels Brock's trust account. I did not know what was being done in this regard until
the summer of 2003, when I received the trust ledgers relating to the money Cassels
Brock purported to be holding in trust in relation to the Tropos Joint Venture.

74.    From a review of the trust ledgers, it appeared to me that Peebles recognized
that the Mauldin Funds were invested in relation to a Cranston matter, and not in the
Tropos Joint Venture because Peebles had amended the deposit instructions such that
they were deposited under a Dito Mundus client number. Dito Mundus was a Cranston
corporation. Neither I nor Tropos had any connection with or interest in it.

               Ref:           Cassels Brock's Trust Ledgers, Exhibit 1, Tab 39, p. 8


75.    Subsequently, it appears that Peebles provided Frontline with a Certificate of
Joint Venture Interest in relation to a $2,000,000 investment in the Tropos Joint
Venture.   It appears from a review of the trust ledgers that the $2,000,000 was
comprised of the Mauldin Funds ($1.2 million) together with an $800,000 deposit from
Rhino on behalf of' Frontline. This makes it appear that the Mauldin Funds may have
                                          - 26-


been accepted on behalf of Frontline. Regardless, they are not accepted in regard to
an investment in the Tropos Joint Venture.

76.   'The fact that the Mauldin Funds were deposited into Cassels Brock's trust
account in relation to Frontline's subscription to the Tropos Joint Venture, which deposit
was made without my knowledge or consent, did not, as far as I was concemed, elevate
Mauldin to the position of an investor in the Tropos Joint Venture. Mauldin's investment
was with Frontline, not Tropos.

              (b)   The rest of the Plaintiffs have no connection with Tropos that
                    would give rise to liability for their alleged losses

77.   The other Plaintiffs, aside from Mauldin, have not pleaded or produced any
documentation to support their allegation that they invested in the Tropos Joint Venture
and lost money as a result of doing so. They have also not pleaded or produced any
documentation to substantiate the assertion that they supplied portions of the Mauldin
Funds, or if they did, what portions were supplied by each. It should be noted that, until
served with the Statement of Claim, I had never heard of the other Plaintiffs.

78.   Mauldin has alleged that Don Myers was at our meeting in June, 2001, but I do
no recall him being identified at that meeting, as stated above.         If Myers was in
attendance at the June 2001 meeting, he must not have participated in our discussions.
Moreover, at the meeting Mauldin told me and Peebles that the money he was
considering investing was money that he had eamed in his construction business. He
made no mention of any of the funds coming from anyone else.          I was very clear in
communicating to Mauldin that he would not be investing in the Tropos Joint Venture,
but rather in Frontline, and that any investor in the Tropos Joint Venture had to meet the
investor criteria, including the requirement that the person investing was the owner of
the funds.   If Myers was present, he must therefore have known that if the Mauldin
Funds included funds from Myers, they could not be invested in the Tropos Joint
Venture, since they did not belong to Mauldin, nor could the funds of others be accepted
                                                - 27-


for the same reason.

              Ref:   Frontline Certificate of Joint Venture Interest for $2,000,000, dated
                     July 31, 2001, Exhibit 1, Tab 37


79.   Thereafter, as noted earlier, Mauldin swore a Funds Ownership Declaration,
which he has produced, in which he attested that the Mauldin Funds belonged to him.
This is completely inconsistent with what Mauldin now alleges in this action.

80.    In any event, if the other Plaintiffs had a connection to anyone, it was to Cranston
and Rhino, not myself or Tropos. Mauldin has produced in this action:

       a.     a Confidentiality Agreement addressed to Rhino from Dan Meyers,
              another Plaintiff;


       b.     a Confidentiality Agreement addressed to Rhino signed by Melvin R.
              Lane, who does not appear to be a Plaintiff. In any event, there is no
              such document addressed to me or to Tropos; and


       c.     both of these documents appear to relate to an investment strategy being
              run by Cranston through Rhino, not to me or to Tropos. In any event, I did
              not see these documents until they were produced in this action by
              Mauldin.

81.   I did not meet with any of the other Plaintiffs, unless Myers was at the meeting
with Mauldin, which as I have stated I do not recall him being. I made no
representations to the other Plaintiffs. Any representations made to them must have
been made by Mauldin, or by Cranston, not by me or by Tropos. To the extent that the
other Plaintiffs provided money to Mauldin, they did so on the strength of
representations made to them by persons other than myself or Tropos.

             Ref:    Canadian Business Magazine, Investigative Report, article by
                     Matthew McClearn entitled "In Trust", Exhibit 1, Tab 41


      3.     Mauldin Suffered No Loss

82.   Mr. Mauldin acknowledges at paragraph 4 of his affidavit that he received back
$76,000 in or about September 2001. This is in fact the case.                    In September 2001,
                                                    - 28-


Mauldin advised me that he needed a $76,000 loan in order to close the purchase of a
house. He told me that he was unwilling to ask Cranston for it as it could affect his
investment with Frontline. I accommodated the request out of sympathy and sent him
$76,000 on the assumption that if he did not pay back the funds, that amount would be
set off against the amount that Tropos ultimately had to redeem to Frontline. Mauldin
did not pay me or Tropos back on this loan. As Mauldin's assertion is that only $75,000
of the Mauldin Funds belonged to him, the net effect is that Mauldin himself recovered
the full amount of his investments plus an additional $1,000, and has suffered no loss
as a result of his investment

                 Ref:'   Mauldin's Affidavit, paras. 1 and 4, and Exhibit "A"


      4.         Mauldin's Testimony Has Numerous Inconsistencies

83.   Mauldin's testimony is very inconsistent Among other things:

            I.   Mauldin has been inconsistent as to who owned the Mauldin Funds.
                 When it was convenient for him, he signed a Funds Ownership
                 Declaration confirming that he had title to the funds. Mauldin has since
                 changed his position and characterized the investment in such a way as
                 having been at all times on behalf of a group. In his affidavit, he refers to
                 "our group" making decisions and taking steps. When he met with me in
                 June 2001, there was no mention of any group of investors. Mauldin
                 spoke only of the funds that he had eamed through his construction
                 business;


           II.   The documents that Mauldin received and signed in relation to his
                 investment came from Cranston, purportedly on behalf of Frontline or
                 Rhino. Now, Mauldin seeks to change the nature of the investment that
                 he made and to impose liability, for the loss he alleges that he and his
                 group have suffered, on me and Tropos.


        III.     Mauldin's affidavit contains statements based on information and belief
                 without either identifying the source of the information or the basis for any
                 belief in them, and without providing direct testimony from the individuals
                                          - 29-


        'involved. He even 'goes as far as to include as an Exhibit a report of a
        purported expert, Professor Byrne, that was commissioned in relation to a
        separate piece of litigation, not the claims advanced by Mauldin or his
        group, in this action;
        Ref:   Mauldin Affidavit, paras. 7, 9 and 34 and Exhibit "T"


  IV.   The Plaintiffs have failed to sue either Frontline or Cranston, with whom
        Mauldin had direct dealings, and upon the strength of whose
        representations Mauldin delivered the Mauldin Funds. No explanation is
        offered for so proceeding;


  v.    It is my understanding that in conducting himself in the manner in which
        he did with regard to the Mauldin Funds and the $50,000 he wired to
        Rhino, Mauldin was in breach of US law and regulations as referred to
        earlier;


 vi.    On November 22, 2005 Mauldin wrote a letter to me in which he stated,
        among other things, that he did. not believe that I was part of a fraud or
        scheme.
        Ref:   Letter from F. Mauldin to R. Hryniak dated November 22, 2005,
               Exhibit1, Tab 42

VII.    On December 6, 2005 Mauldin wrote to his counsel in which he notified
        them to withdraw his name from the lawsuit filed against me on the basis
        that he had been pressured into signing a letter, dated July 28, 2005,
        giving his permission to include himself in a group of plaintiffs launching a
        class action suit; and
        Ref:   Letter from F. Mauldin to his counsel dated December 6, 2005,
               Exhibit 1, Tab 43

viii.   Another Plaintiff, Robert Blomberg, sent to me a copy of a letter he wrote
        to the Plaintiffs' counsel stating that they had used his name without his
        authorization, that he had never authorized anyone, including Dan Myers,
                                           - 30-


             to use his name in any legal proceedings.·
             Ref:   Letler from R. Blomberg to R. Hryniak dated December 6, 2005,
                    Exhibit 1, Tab 44


      5.     Peebles has misconducted himself and has made misleading and
             inconsistent statements which were not in any way authorized by
             myself or Tropos

             (a)    In Dealings with Tropos and Myself

84.   Peebles failed to obtain or follow my instructions with regard to the following:

      a.     Peebles accepted the Mauldin Funds into the Cassels Brock Trust
            Account, and assigned to them Tropos Client Number, without my
             knowledge, authorization, acquiescence or consent. This deposit was
             assigned the Tropos client number notwithstanding that it appears to have
             been deposited on the instructions of Cranston in relation either to the
             business of Rhino or in relation to an investment that Mauldin was making
             in Frontline. It appears that Peebles may also have had a solicitor-client
             relationship with Cranston, which if correct would have made it all .of the
             more unacceptable that the Mauldin funds were assigned the Tropos
             client number;


      b.     Peebles and Cassels subsequently appear to have re-assigned the Client
             File Number relating to the Mauldin Funds in their Trust Account to that of
             Dito Mundus, a Cranston corporation. It appears that even Peebles knew
            that the Mauldin Funds had been deposited in relation to Cranston's
             business, and not that of Tropos or me;


      c.     Peebles apparently initiated and caused to be carried out numerous
            entries, including the foregoing, in the Cassels Brock trust account under
            the client file numbers relating to Greenfield Plastics or Tropos Financial
            that I did not authorize, acquiescence or even know about at the time.
            These transactions appear to have been made on the instructions of
            Cranston, and for the benefit of Cranston. They include the following:
                    i. Disbursement to Brian Hardcastle $28,000 in November, 2001;
                                               - 31 -


                      ii. Transfer of $250,000 from the Cassels Brock trust account
                           under the Tropos client number to Rhino on or about May 30,
                           2002;

                     iii. Transfer of $1,000,000 to Windsor Provident Bank on July 10,
                           2002;

                     IV.   Reversal of that payment and a corresponding deposit back into
                           the Cassels Brock trust account under the Tropos Financial
                           client file number on July 17, 2002, and ultimately

                     v. A disbursement of $1,000,000 to Rhino, Cranston's company,
                           on July 18, 2002.


85.    None of the foregoing transfers were approved by me, or even known to me
when they were made. I did not become aware of them until the summer of 2003, when
I learned that Peebles and Cassels had accepted another deposit, not related to this
action, from Bruno Furniture without rny knowledge or authority. In order to investigate
what had happened, I dernanded a copy of the Cassels Brock trust ledgers.                Upon
reviewing them I learned of the inappropriate transfers that had taken place in relation to
Maudlin, including those noted above.

              Ref:   Cassels Brock's Trust Account Ledgers, Exhibit 1, Tab 39


               ii.   As I understand it, based upon what Peebles told me, the above
                     noted disbursernents would have had to be approved by at least two
                     partners frorn Cassels Brock, although the docurnentation relating to
                     such approvals has not been produced to date.              It seems clear,
                     however, from other documentation that Cassels Brock had a policy
                                                 - 32-


                        of having two partners authorize disbursements from the Cassels
                        Brock trust account.

                 Ref:   Cassels Brock Cheque payable to Tropos, dated March 26, 2002, in
                        the amount of $3,500,000, Exhibit 1, Tab 45

                 (d)    In Dealings with Mauldin

86.    It appears that Mauldin's Frontline Joint Venture Documents were plagiarized
from the Tropos Joint Venture Documents that Peebles drafted for me, whether by
Cranston himself, or by Peebles assisting Cranston. It appears that Cranston then used
the plagiarized documents to raise funds for Frontline to invest in the Tropos Joint
Venture by way of a Frontline Joint Venture instead of by raising equity financing for
Frontline, as he had represented to me that he would be doing.· In any event, I had no
knowledge of this misuse of the Tropos documents, nor did I consent to or
acquiescence in such misuse.

                 Ref:   Mauldin's Frontline Joint Venture Documents, Exhibit 1, Tab 30

                        Draft Tropos Joint Venture Documents, Exhibit 1, Tab 4


87.    It   is   not    clear   to   me    whether· or       not   Peebles       participated   in   any
misrepresentations made by Cranston to the effect that Mauldin's Funds would be
invested directly in the Tropos Joint Venture but, regardless, Peebles's apparent
participation in the plagiarizing of the. Tropos Joint Venture Documents was not
appropriate conduct and was not conduct that I had consented to or even knew of until
seeing Mauldin's Frontline Joint Venture Documents for the first time when I received
them from Fornelli in December 2005.

                 Ref:   Mauldin's Frontline Joint Venture Documents, Exhibit 1, Tab 30

                 (e)    Peebles Conflict of Interest

88.    I am not responsible for Peebles and Cranston's misconduct, which was entirely
unauthorized by me. I was not aware of such misconduct at the time, or that Peebles
may have had a solicitor-client relationship with Cranston, or that Peebles had opened a
file, evidenced by the client number in the trust ledgers, and was dealing with trust funds
for Cranston as a client. Had I been aware of this, an obvious conflict of interest, I would
                                                    - 33-


have terminated any relationship with Peebles and Cassels Brock.

                   Ref:    Cassels Brock's Trust Account Ledgers re Dito Mundus; Exhibit 1,
                           Tab 39, p. 8



             6.    I am Not Liable for the Plaintiffs' Alleged Losses

89.          Contrary to the claims made by the Plaintiffs in this case, I am not liable to them
for the losses they allege they have suffered, because:

        i.         The Plaintiffs did not invest in the Tropos Joint Venture. To the extent
                    they invested at all, they invested in a Joint Venture being run by
                    Frontline;

       ii.         The Plaintiffs, other than Mauldin, have not pleaded or adduced any
                    evidence to establish that they contributed funds to the investment that
                    Mauldin purported to make

      III.         Maudlin's investment was limited to $75,000, which amount he recovered
                    from me, thereby obviating any loss he might have alleged to have had at
                    one time

      iv.          The Plaintiffs cannot establish that they made their investment on the
                    basis of any representations made by me, but rather it appears that there
                    investment was made on the basis of representations either by Mauldin or
                    by Cranston relating to some investment strategy that had return pqtential
                    far greater than I was proposing for the Tropos Joint Venture; and

      v.           I did not perpetrate a fraud in relation to the Tropos Joint Venture. The
                    Tropos Joint Venture contemplated a legitimated .but commercial
                    transaction and therefore, in and of itself, to not give rise to liability to the
                    Plaintiffs for their alleged losses.


90.      To the extent that the Maudlin funds were included in the funds that were
invested in the Tropos Joint Venture, they were stolen from NSB through no fault of
                                                 - 34-


mine. I did all that I could think of in order to recover the funds, but such recovery was
unfortunately impossible.

91.         I make this Affidavit in order to set forth the facts contained in it, and for no other
or improper purpose.


SWORN BEFORE ME at the City)                                                         •
of Toronto, in the Province of )
Ontario, this U~ day of        )
January, 2009       I    ff d/7 )
  P:i',r=trii~e{(~::;Affidavits, etc.
       ~C\~             s:-"". . :-1\...~
1268310.8
                                     SCHEDULE A

                       CAST OF CHARACTERS re MAULDIN




Robert Hryniak ("Hryniak")

      I am an individual residing in the City of Toronto, in the Province of Ontario. I am
     the principal of the following corporations: Tropos Equities Corporation ("Tropos
      Equities"), a Canadian corporation with its head office in the City of Toronto;
     Tropos Capital Inc. ("Tropos Capital"), an Ontario corporation with its head office
     in the City of Toronto; and Tropos Financial Corporation ("Tropos Financial"), a
      Barbados corporation.    These corporations may be, in suitable circumstances,
     referred to collectively as "Tropos."




Gregory Peebles ("Peebles")

     Peebles was a partner of the law firm Cassels Brock & Blackwell LLP ("Cassels
     Brock") until August 31, 2004. He was at various times the Managing Partner and
     a member of the Executive Committee of that law firm. In addition to ongoing
     corporate activity, in or about 2000 I retained Peebles to assist me in establishing
     a corporate structure for purposes of allowing me to carry on basis trading and
     other investment activity and also to establish a joint venture structure, for the
     purposes of raising capital with which to trade (the "Tropos Joint Venture").
     Peebles was intimately involved in the Tropos Joint Venture. He drafted the
     documents relating to it (the "Tropos Joint Venture Documents"), met with
     investors and potential investors, had direct dealings with the bank, NSB, as
     hereinafter defined, and was a signing authority on the NSB bank account.
                                                -2-


             Ref:   Specimen Signature Card empowering G. Peebles assigning Officer for NSB
                    account, Exhibit 1, Tab 46


Robert Cranston ("Cranston")

      Cranston is an individual who was introduced to me in late 2000. In early 2001
      Cranston told me that he was the principal of Frontline Investments Inc.
      ("Frontline") and that he intended to raise equity financing in Frontline in order to
      generate sufficient funds in Frontline that Frontline could then invest, as a
      principal, in the Tropos Joint Venture.

      When I began to deal with Cranston, I believed that he had authority to represent
      Frontline and that he was a legitimate business person. It was only much later,
      and well after the events that have given rise to these proceedings, that I learned
      of his fraudulent conduct and that he did not, in fact, have any authority to
      represent Frontline after November 2001. I learned this in the summer of 2003
      from Robert Fornelli ("Fornelli"), referred to below.




Frontline

      Frontline is a company originally incorporated in Panama on April 19, 1999. It
      was originally a company which Cranston was the principal.

      On or about November 7, 2001, Cranston divested his entire interest in Frontline
      to Robert Fornelli ("Fornelli"), an individual residing in the State of California, in
      the United States of America. On November S, 2001, Fornelli had it registered in
      SI. Vincent and the Grenadines, as an existing Panamanian company.

      Since November 7, 2001, the only individuals with authority to bind Frontline or
      conduct business through it, were Fornelli and, for period of time, Elise Tooley.
                                                       -3-

              Ref:    Fax from R. Fornelli to R. Hryniak, dated July 10, 2003, Exhibit 1, Tab 47

                      Email from R. Fornclli to R. Hryniak, dated November 6, 2008, Exhibit 1, Tab 29


      On various occasions in 2001, Frontline advanced funds, totalling$4.5M, to
      Tropos Financial in return for corresponding interests in the Tropos Joint
      Venture. These funds were advanced by Frontline as principal, not as agent for
      its investors, as specified in the Tropos Joint Venture Documents.

              Ref:   . Tropos Joint Venture Documents executed by R. Cranston, on behalf of Frontline
                       on July 2001, Exhibit I, Ta 37

                      Funds Ownership Declaration executed by R. ForneJli on May 15,2004, Exhibit 1,
                      Tab 48


      Contrary to the assertions of the Plaintiffs, Frontline is not a "dummy" company
      used by me or Tropos for anything. It is an arms length, independent corporation
      and I am advised by Fornelii, and verily believe, that it has clients and
      investments beyond those that relate to the Tropos Joint Venture.




Rhino Holdings Inc. ("Rhino")

      Cranston was also the principal in Rhino. I do not know anything about Rhino's
      business or the jurisdiction in which it was incorporated but in July 2003 I was
      advised by Fornelii, and verily believe that while Cranston was a principal of
      Frontline he collected some of the funds from individuals who invested                               In

      Frontline using Rhino bank accounts at the Bank of N.T. Butterfield & Son Ltd.,
      55 Front Street, Hamilton, Bermuda HM AX.

              Ref:    Exchange of cmails between Frontline and. R. Hryniak, dated July 22, 2003, Exhibit
                      1, Tab 49




Dito Mundus

      Cranston was also the principal of Dito Mundus. It appears that the Mauldin
      Funds (as hereinafter defined) were held by Peebles and Cassels Brock in a
     Cassels Brock trust account ascribed with the client number for Dito Mundus.
                                                -4-


      Cassels Brock appears to have acted on behalf of Dito Mundus, as it has a client
      file number for Dito Mundus and retained money in trust on its behalf.
      Accordingly, it appears that Peebles and Cassels Brock had a solicitor-client
      relationship with Cranston at the same time they had a solicitor-client relationship
      with me.




New Savings Bank ("NSB")

      NSB was a bank based in Montenegro that specialized in offshore cash arbitrage
      and trading. It was reputed to have an extensive client base of high net worth
      corporations and individuals and an extensive network of correspondent
      relationships throughout the world.           I chose NSB as the bank with which to
      execute the trading strategy for the Tropos Joint Venture because I was aware
      that one of its clients, Aro Motor Corporation ("AMe"), a corporation owned by
      Ole Spaten, had available for sale an appropriate volume of securities that would
      be appropriate for the trading strategy I wished to implement for the Tropos Joint
      Venture and that those securities were located at NSB. Out of an abundance of
      caution, I asked Peebles and Cassels Brock to do some research into NSB, AMC
      and Ole Spaten to confirm that they were all legitimate. That research did not
      turn up anything that gave me concern or suspicion in relation to any of them.

                   Ref:   NSB Promotion Material, Exhibit 1, Tab 50

                          Due Diligence Research Results conducted by Cassels Brock    011   Ole R.
                          Spatcn, November 14 and December 4, 2001, Exhibit 1, Tab 7

                          Due Diligence Research Results conducted by Cassels Brock on NSB,
                          Exhibit 1, Tab 6




Jay Pribble ("Pribble")

      Pribble was, at all material times, the Senior Vice President and General
      Manager of NSB.      Before deciding to deal with NSB I asked Peebles and
                                                          -5-


            Cassels Brock to research Jay Pribble as well. Once again, nothing turned up
            that would give rise to any concern that he might be a fraud.

            In or about July 2002 I was advised by Denise Dwyer and verily believe that
            Pribble had closed all NSB's commercial accounts, including Tropos Financial's
            accounts, and made off with the proceeds.

                   Ref:   Due Diligence Research Results conducted by Cassels Brock on Jay Pribble, Exhibit
                          l, Tab 51



Denise Dwyer ("Ms. Dwyer")

            Ms. Dwyer was the International Director at NSB. Ms. Dwyer was my main
            administrative contact with NSB. She took and filled all of my instructions relating
            to the money Tropos Financial had on deposit with NSB, interfaced with Peebles,
            HSBC and myself and provided all the banking documents to open the banking
            and brokerage accounts with NSB. Peebles and Cassels Brock did some
            research into Mr. Dwyer's background as well. Again nothing of concern turned
            up.

                  Ref:    Due Diligence Research Results conducted by Cassels Brock on Denise Dwyer,
                          Exhibit 1, Tab 52

1268624.4
            MAULDIN ET AL.   -and-   CASSELS BROCK et al.       Court File No: 05-CV-300149 PD2


                                                                         ONTARIO
                                                                SUPERIOR COURT OF JUSTICE

                                                                  Proceeding commenced at Toronto




                                                            RESPONDING MOTION RECORD OF THE
                                                               DEFENDANT, ROBERT HRYNIAK
                                                               (RETURNABLE MARCH 30, 2009)



                                                            LERNERS LLP
                                                            Barristers & Solicitors
                                                            130 Adelaide Street West
                                                            Suite 2400
                                                            Box 95
                                                            Toronto, ON M5H 3P5

                                                             Don H. Jack LSUC#: 14307Q

                                                            Tel: (416) 867 c3076
                                                            Fax: (416) 867-9192

                                                             Solicitors for the Defendant, Robert Hryniak


1020554.1

				
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