Mayor alleges 'cheque-kiting'
Winnipeg Free Press
Wednesday August 17 2005
By Paul Egan
WINNIPEG Mayor Sam Katz is suing the accountants of a bankrupt furniture company in which he was a director, alleging the accountants failed to keep accurate books and the furniture company was involved in a $30-million-plus "cheque-kiting" scheme.
The furniture company, Lemax Corp. Inc., was placed in receivership and declared bankrupt in 2002. The Lemax accountant was Sill Streuber Fiske & Co., which became Sill & Co. and later became part of BDO Dunwoody, the statement of claim says.
Katz is suing BDO Dunwoody Ltd., BDO Dunwoody LLP, and accountant David L. Anderson, a BDO Dunwoody partner whom Katz alleges worked for its predecessor companies. Katz is seeking more than $2.6 million in damages and three Katz companies are seeking about another $518,000.
"That's a significant amount of money, in my eyes," Katz told the Free Press yesterday.
"The defendants breached the duties of care that they owed to the plaintiff by not taking such care as to ensure that the financial statements reported information that was true and reliable concerning the financial affairs and status of Lemax," Katz alleges in the statement of claim filed Aug. 5 in Manitoba Court of Queen's Bench.
None of the allegations is proven in court and a statement of defence has not yet been filed.
"We will be filing a statement of defence," said Eric Stefanson, the accounting firm's regional managing partner for Manitoba, who spoke on behalf of both BDO Dunwoody and Anderson. "We feel that we have a solid case and a strong defence."
Katz has maintained numerous business interests since he was elected mayor in 2004, most notably his position as president of the Winnipeg Goldeyes baseball club. He says he declares a conflict of interest and leaves the room whenever an issue related to one of his business interests arises at a city council or committee meeting.
The Lemax financial statements for 1999, 2000, and 2001 "contained material errors, misstatements or irregularities," that BDO Dunwoody or its predecessor companies should have known about, Katz's statement of claim alleges.
Also, "a review of Lemax's bank statements and cheques indicated that it was involved in a cheque-kiting or short-term loan scheme in 2000 and 2001," the statement of claim alleges.
"In the fiscal year that ended Feb. 28, 2001, more than $26.5 million (Cdn) and US $7.5 million passed between Lemax and at least one other company by cheques drawn on their bank accounts. "By comparison, Lemax's annual sales as reported in its financial statements for the year that ended Feb. 28, 2001, were less than $6.5 million."
The statement of claim does not identify the other company or companies involved in the alleged cheque-kiting or short-term loan scheme. Katz, who was reached yesterday while on vacation, said he had not read the final draft of the statement and could not say what other company was involved.
Cheque-kiting exploits the fact cheques are often credited immediately to a recipient's account, but may take several days to be debited from the account of the cheque writer. That allows for a time period during which the amount of the cheque is credited to both accounts. The effect can be compounded by an ongoing series of "kited" cheques.
According to an RCMP statement in an unrelated case, cheque-kiting can amount to criminal fraud if cash is recorded in more than one bank account, but in reality the cash is either non-existent or in transit.
Katz alleges that he and three of his companies -- Showtime Productions Inc., Encore Development Corp. Ltd., and Destiny Investments Ltd. -- lost about $750,000 they invested in Lemax. Katz also alleges that as a director of Lemax he had to pay about $2 million to satisfy Lemax debts and he could still be on the hook for about another $400,000.
The Lemax bankruptcy spawned a series of lawsuits and countersuits involving Katz and Lemax creditors.
Although a Lemax director, Katz earlier told the Free Press and repeats in his statement of claim that he was essentially a "silent partner" who was not involved in the company's day-to-day activities.
BDO Dunwoody has done work for the City of Winnipeg in the past, but city officials could not confirm yesterday whether the company has any current city contracts.
Lemax was founded in 1985 by businessman Joey Klapman, who could not be reached for comment. Katz joined as a partner, director and financier about three years later, according to records in related court cases. Initially, the company made duvets, pillows, and blankets. It later expanded into manufacturing furniture, other case goods and church pews. At one point, Lemax had about 150 employees. The company had accumulated debts of more than $8 million by the time it went bankrupt.
paul.egan@freepress.mb.ca
Cheque-kiting: how it works
IN the most common variation of the scheme, a cheque-kiter will open several accounts at different banks and deposit minimal funds in each one.
He then writes cheques for large amounts on each of these accounts, all the while withdrawing funds after each false deposit, and he continues to write non-sufficient funds cheques to cover the withdrawals that are made.
The kite can go on for weeks before one of the accounts goes into overdraft when the cheques are returned NSF.
By then, the fraudster has made off with thousands of dollars or more and the financial institutions are left holding the bag.
Kiting is a criminal offence, and can also smear a person's credit history.
-- Source: criminalfraud.com, an information website designed by fraud consultants