Fraudsters, gamblers and a mining company: tracing and clawing back funds from third parties

Cyber-fraud is increasingly an issue for all of us, and despite the most stringent cyber-security measures, matters can still slip through the net.

Tracking down the culprit sometimes might not be possible, but there are ways of tracing and then clawing back stolen money from third parties who have received it, as a  recent case shows (Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101; Clayton Utz acted for the successful plaintiffs).

The $2 million payment

Two related mining companies were defrauded by a person pretending to be an authorised representative of one of the company's creditors.

On 30 May 2016, the companies paid a total over $2 million to the bank account of a company incorporated in Norfolk Island that carried on a wagering business trading as "Pinnaclebet", Worldwide Wagering.

The two men behind the wagering business, Robert Hill and Nicholas O'Connell, suspected that the funds may have been stolen as a large deposit had been made two weeks prior, which was determined to be the product of a fraud.

The pub meeting

The day after the $2 million payment, the two men met with Andrew Sigalla, who claimed to be entitled to the funds in a Sydney pub. After some correspondence, they then credited Mr Sigalla's betting account. 

Mr Sigalla was not a total stranger to them; he had gone to school with Mr Hill, married Mr Hill's cousin, and was known by Mr Hill to be a big gambler. Both Mr Hill and Mr O'Connell denied knowing that at the time Mr Sigalla was the subject of criminal charges relating to fraud.

From 1 June 2016, Mr Sigalla was then permitted to gamble with the $2 million (he lost most of the bets). Lady Luck has not smiled on him in other parts of his life either; he's currently serving time in a NSW prison for fraud.

The transfer of funds

The funds didn't just sit in Mr Sigalla's account. Before he placed any bets, on 1 June 2016, $800,000 was transferred to a bank account held by a related company, The Odds Broker, also operated by Mr Hill and Mr O'Connell.

In the first week of June a further $1 million was transferred in two tranches to another Worldwide bank account. Some of this went to  Mr Hill's personal account and was used to settle the purchase of a property in Bondi Junction in the names of Mr Hill and Mr O'Connell on 14 June 2016.

A total of $550,000 was also paid to Mr Sigalla in the first week of June. 

At approximately 1.13pm on 7 June 2016, the defendants' bank contacted Mr Hill to inform him of the fraudulent nature of the $2 million payment. By that time, most of the money had already been disbursed.

On the afternoon of 10 June 2016, the mining companies obtained orders to freeze the Worldwide account. 

The mining companies' claim for relief

The mining companies claimed the stolen funds from Worldwide, The Odds Broker, Mr Hill and Mr O'Connell, and proprietary relief in respect of the Bondi Junction property.

The defendants admitted they had received the stolen funds, and the subsequent dealings, but that they owed the companies nothing because:

• they received the funds as bona fide purchaser for value without notice, because they had no knowledge of the fraud until 1.13pm on 7 June 2016; and
• Worldwide had changed its position on the faith of the receipt of the stolen funds by accepting Mr Sigalla's bets and laying off those bets with back-to-back bets with international bookmakers with whom Worldwide maintained wagering accounts.

What did the defendants know (or should have known) - and when?

The Court found that the knowledge of the defendants would have led an honest and reasonable person in Mr Hill and Mr O'Connell's position to have made further inquiries before crediting Mr Sigalla's account with the stolen moneys.

If the inquiries had been made (eg. to call the mining companies to ask why they had credited $2 million to a wagering account), the fraud would have been revealed and Mr Sigalla's betting account would not have been credited. This knowledge was attributable to Worldwide and The Odds Broker.

This failure to make a simple inquiry was wilful and reckless. The Court referred to Mr O'Connell's and Mr Hill's prior involvement with Mr Sigalla, who had previously suggested that he would bring in large betting customers to Worldwide. Worldwide's end goal was to "accrue a lot of customers" and then sell the business. These considerations caused Mr Hill and Mr O'Connell to make only superficial inquiries, rather than the inquiries that an honest and reasonable person would have made. The Court found that wilfulness and recklessness were motivated by the desire to keep Mr Sigalla "on side" in the hope that he would assist them to grow the business.

Common law claim for money received

In a common law action based on money paid by mistake, the plaintiff does not have to allege or prove that the retention of the money received by the defendant would be inequitable. That is a matter for the defence.

In relying on the change of position defence, the recipient must act in good faith. A defendant relying on a change of position defence who, prior to the change of position, wilfully and recklessly fails to make such inquiries as an honest and reasonable person would take in all the circumstances, does not act in good faith on the assumption that he or she is entitled to deal with the mistaken payment.

The Court found that the defendants did not make these inquiries, and that the mining companies were entitled to succeed on this basis.

Receiving money as a volunteer and becoming a constructive trustee

The plaintiffs also succeeded on this ground, which was based on the Black v Freedman principle that a third party who receives stolen money as a volunteer is obliged to account to the beneficial owner of the property, to the extent the recipient holds the property or traceable proceeds, at the time the recipient obtains sufficient knowledge of the theft. 

In this case:

• Worldwide became liable to account as constructive trustee when, with sufficient knowledge of the fraud, Mr Hill and Mr O'Connell credited the funds to Mr Sigalla's betting account on 1 June 2016.
• The Odds Broker became liable as constructive trustee when, with sufficient knowledge of the fraud, it received the traceable proceeds of the funds comprised in the $800,000 on 1 June 2016.
• Mr Hill became liable as constructive trustee when, with sufficient knowledge of the fraud, he received the traceable proceeds of the $800,000 in tranches on 2 and 3 June 2016.

Knowingly assisting another to breach its trust obligations

The finding that various defendants were constructive trustees led to another argument - that Mr Hill and Mr O'Connell had knowingly assisted the trustees to breach their trust obligations, and were therefore liable for it (the second limb in Barnes v Addy).

The Court found for the plaintiffs on this basis too:

• Mr Hill and Mr O'Connell knowingly assisted Worldwide breach its trust obligations.
• Mr O'Connell knowingly assisted Worldwide and The Odds Broker to breach their respective trust obligations in relation to the payment of $800,000.
• Mr O'Connell knowingly assisted Mr Hill to breach his Black v Freedman trust obligations in relation to the purchase of the Bondi Junction property.

Indefeasibility of title under property not so indefeasible

The defendants claimed that the mining companies could not have recourse to the Bondi Junction property by reason of indefeasibility of title.

Given that Mr Hill had the same knowledge of the fraud, the transaction fell within an exception to indefeasibility - fraud.

The plaintiffs' claims for an equitable charge fall within the in personam exception. The plaintiffs' claim for an equitable charge (an in personam claim) arose from it establishing the known legal causes of action based on:

• Foskett v McKeown principle ie. a beneficial owner of misappropriated property can recover it or its traceable proceeds from the person holding the asset, unless the holder is a bona fide purchaser for value without notice.;
• Mr Hill's breach of Black v Freedman trust obligations; and
• knowing assistance in that breach by Mr O'Connell. 

The key lessons if you suspect a fraud

If you think funds have been fraudulently taken from your account, take action immediately! Often a fraudster's main aim is not to amass funds and hold them, but to convert them as soon as possible into goods and services, so you need to act before the trail goes cold or the funds are all spent. Swift action by the plaintiffs in this case made tracing the funds and obtaining freezing orders fairly straightforward.

Even if the funds have been transferred to a third party, all is not lost:

• A person cannot hide behind superficial inquiries as to ownership to avoid a finding of knowledge. The inquiries must be the inquiries an honest and reasonable person would make.
• A third party who receives stolen money as a volunteer effectively holds the property of the beneficial owner on trust, to the extent the recipient holds the property or traceable proceeds, at the time the recipient obtains sufficient knowledge of the theft (the Black v Freedman trust).
• A person cannot rely on the indefeasibility of title under properly law legislation if an equitable charge has been created in another person's favour by reason a of a known legal cause of action, including a breach of a Black v Freedman trust.