Bank of Montreal is suing a U.S. businessman and a group of alleged Canadian associates, alleging they ran a "cheque-kiting scheme" that targeted several banks, cost BMO $20-million and involved $750-million (U.S.) in fraudulent cheques.
Essentially, cheque kiting begins with the writing of a cheque pledging money one doesn't have. An accomplice cashes it immediately, and then writes a cheque right back to cover the original overdrawn bank account, all before the cheques clear.
A complex circle of cheques develops, circulating mostly fictional money and usually involving multiple people or companies and multiple banks. Essentially, such schemes use the time lag cheques take to settle to create money out of thin air – until the banks get wind of it.
BMO filed its lawsuit last year, alleging that Mair Faibish of Long Island, N.Y., the former chief executive officer of a bankrupt food company called Synergy Brands Inc., had participated with several Toronto-area business people in an international cheque-kiting ring. Mr. Faibish is also facing criminal charges in the United States, and was arrested in April. He has pleaded not guilty.
BMO alleges that Pickering, Ont., businessman Giuseppe (Joe) Gatti, and his wife, a Whitby, Ont. lawyer named Taragh Bracken, are among a list of defendants involved in the same cheque-kiting scheme.
BMO alleges Mr. Gatti used the scheme to inflate the revenues of Toronto-area food companies known collectively as the Loretta Group and fraudulently secure $20-million in financing from the bank. The companies are now in receivership.
None of the allegations have been proven in court, and all of the defendants deny in court filings that they were involved in any cheque-kiting scheme.
Both BMO and its lead lawyer, Munaf Mohamed of Bennett Jones LLP, declined to comment on the case.
Toronto Police say that in May, Mr. Gatti surrendered to them and was charged with fraud over $5,000 in relation to another alleged cheque-kiting scheme dating back to 2007, which targeted the Royal Bank of Canada. According to court documents, RBC had settled allegations in a civil case against Mr. Gatti for what he describes as a "nominal" amount.
Richard Quance, a lawyer with Himelfarb Proszanski LLP who acts for Ms. Bracken, said that the bank's "bald allegations" against her show "little if any basis to assert a claim against her" and that his client "will vigorously defend the claim." Neither Mr. Gatti nor a lawyer for him could be reached for comment.
Furthermore, in court documents, Ms. Bracken denies BMO's allegations that she had any knowledge of or participated in any alleged cheque-kiting scheme or received any money improperly from the bank. She alleges that the bank's losses should be blamed on its failure "to discover any alleged cheque-kiting scheme or other wrongdoing by other defendants to this action."
Ms. Bracken's lawyers also state in court documents that even a forensic accounting report submitted by BMO to the court "alleges that a cheque-kiting operation may have been used by certain parties but does not contain any opinion that Bracken was a party to or even aware of any cheque-kiting scheme." Her lawyers also deny that she was involved in the day-to-day operations of Loretta Foods and state that there is no evidence to support such a contention.
Mr. Faibish asserts in a statement of defence submitted to Ontario Superior Court that funds his company exchanged with the Loretta Group and other companies were for "legitimate business purposes."
His company, which made baking mixes, spices and packaged meals, was once listed on the Nasdaq Stock Market. It also counted Bill Rancic, the first winner of Donald Trump's The Apprentice reality show, as a director, after Synergy bought his online cigar company.
U.S. prosecutors allege that from about January, 2008, to May of 2010, Mr. Faibish "engaged in an extensive cheque-kiting scheme" that targeted Signature Bank and Capital One Bank. The scheme "artificially inflated" his companies' cash flow by $26-million, the indictment filed in U.S. District Court for the Eastern District of New York alleges.
Mr. Faibish's U.S. lawyer, Joseph Ryan, reached in Melville, N.Y., said his client is fighting the allegations: "Mr. Faibish denies any wrongdoing and intends to prove there was no cheque-kiting scheme."
Fraud experts say cheque-kiting rings are still surprisingly common, although there are fewer in an age of increasingly instant electronic transactions.
"It's as old as the hills, cheque-kiting," said Alan Stewart, a forensic accountant and partner with Deloitte in Toronto. He is not involved in BMO's case and would not comment on it specifically.
"There's always some underlying amount of money to begin with, but it can get leveraged up fairly readily. When the music stops, one or more banks are holding the bag."