The Supreme Court of Canada announced earlier this year it had dismissed a firm’s application for leave to appeal following unsuccessful attempts in the Ontario courts to sue its insurer for financial damages after being victimized by a Ponzi scheme fraud.

Surefire Dividend Capture, LP (SDC) wished to recover more than USD $30 million in losses incurred as a result of investments in Broad Reach Capital, LP (BRC), a hedge fund.

The Ontario Superior Court of Justice ruled against Surefire in 2023. Surefire appealed that decision to the Court of Appeal for Ontario, the province’s highest court. The Court of Appeal’s 2025 decision in Surefire Dividend Capture, LP v. National Liability & Fire Insurance Company (Berkshire Hathaway Specialty Insurance), 2025 ONCA 332, upheld the lower court ruling.

SDC had transferred $4.51 million to BRC between December 26, 2018 through January 31, 2019, under a subscription agreement that described the transfers as capital contributions to BRC, for which SDC would receive a limited partnership interest in BRC in return.

SDC also acquired a further interest in BRC in February 2019 as the interests of three “A Funds” created by Bluestone Capital Management, an asset management firm, which had made capital contributions of $26.73 million USD to BRC between 2016 and 2018, were subsequently transferred to SDC.

Upon entering into the business agreement with BRC, SDC was unaware that Brenda Smith, the CEO of BRC, was operating a fraudulent Ponzi scheme for which she would ultimately plead guilty to securities fraud in a U.S. District Court in 2021 and be sentenced the following year to 109 months in prison.

Trial court questions SDC interpretation

SDC brought legal action to recover these losses under a fidelity bond issued by the National Liability & Fire Insurance Company (Berkshire). The fidelity bond provided coverage to SDC for losses caused by dishonest or fraudulent acts committed by an “employee” and for losses resulting from “theft of customer property by a registered representative.”

Trial judge Peter Cavanagh of Ontario’s Superior Court of Justice found that key definitions within the fidelity bond differed from SDC’s interpretation of what they meant, and could claim against. For example, Cavanagh found that Smith, in her capacity as CEO, did not fit the definition of an “employee” as defined by the fidelity bond. Nor did he believe that Smith had stolen “customer property” as the bond described. 

Another issue at stake was whether SDC made it known to Berkshire that it wanted insurance coverage against fraud to cover a possible Ponzi scheme committed by or under the direction of an underlying manager or sub-advisor.

SDC argued that during a telephone conference in 2018 oral assurances were provided by a representative of Berkshire about what would be covered.

Cavanagh noted in his ruling that Ariel Shlein, the chief executive officer and indirect owner of a numbered company serving as the general partner of several limited partnerships affiliated with SDC, “was seeking coverage from Berkshire for the SureFire entities for loss resulting from fraud and theft by BRC.”

But Cavanagh said the term “Ponzi scheme” was not mentioned by the insurance broker as a coverage being sought until a February 2019 e-mail. His ruling also said the evidence did not show that Berkshire told the insurance broker, or Shlien, that the Bond would provide coverage for SDC for theft and fraud under the direction of a sub-advisor.

“To the contrary, on February 21, 2019, [Berkshire] responded to [the insurance broker’s] request about coverage for loss resulting from a Ponzi scheme by stating that coverage for such a loss under a fidelity policy would be unlikely,” Cavanagh said.

He also found there was no coverage under Insuring Agreement A(4) of the fidelity bond that provided coverage for loss that resulted directly from “theft of customer property by a registered representative.”

The trial judge’s position was that there had been no theft of SDC’s property because once SDC’s funds were invested with BRC, SDC did not retain any property interest in the funds. “Only BRC had a property interest in the money stolen or diverted by Ms. Smith,” Cavanagh said in his ruling against SDC’s claim.

Multiple issues raised on appeal

SDC appealed that decision, asserting five major issues with the lower court’s interpretation.

It argued that the trial judge erred in law by giving effect to a defence not pleaded by Berkshire, and which only appeared for the first time in the trial judge’s reasons. SDC said the trial judge violated this principle by giving effect to a defence that Insuring Agreement A(1) did not cover losses resulting from Smith’s fraud as an officer of BDC, not an employee.

SDC also claimed the trial judge erred in law in finding that SDC could not make a claim for its own losses under Insuring Agreement A(1) because he failed to interpret the Bond as a whole.

SDC also asked the court to decide – although the trial judge had not done so, whether if SDC had coverage for BRC employee fraud under Agreement A(1), and that fraud caused a loss, whether that coverage would not be defeated by Berkshire’s position that Smith was BRC’s ‘alter-ego.’

SDC further claimed that the trial judge’s conclusion that there was no coverage under Insuring Agreement A(4) was erroneous because it “defies common sense.”

SDC also argued that the trial judge erred in finding that any claim of SDC was limited to its direct investment and could not include the investments of the “A Funds” subsequently transferred to SDC.

Differing interpretations by Court of Appeal

The Court of Appeal for Ontario rejected the first ground of appeal. “The onus is on the insured to prove its claim falls within the grant of coverage,” wrote Justice Benjamin Zarnett, in a decision that was unanimously approved by Justices Patrick Monahan and Renee Pomerance.

In this instance, the onus was on SDC to prove that its claim fell within the coverage granted under the Insuring Agreement, and in order to do so, the company needed to prove that Smith, BRC’s CEO, met the definition of employee of the insured in the fidelity bond, said Justice Zarnett.

“The defence that Ms. Smith was not an Employee of SDC, and that she did not meet the definition of Employee so as to allow SDC to make a claim for coverage under Insuring Agreement A(1) was clearly on the table. The trial judge did not err by considering it,” he elaborated.

The Court of Appeal also disagreed with SDC’s contention that the trial judge erred in his interpretation of Insuring Agreement A(1). SDC argued that an extricable legal error had been made by failing to interpret the fidelity bond as a whole, and that a correctness standard should therefore apply.

The Court’s ruling said “SDC does not identify a relevant provision of the Bond or its Riders that the trial judge failed to take into account.” It also noted that central to SDC’s argument that the trial judge’s interpretation was flawed was its disagreement with the significance the trial judge ascribed to the fidelity bond’s reference to BRC as a “Subsidiary.”

“In my view, the interpretive decision the trial judge arrived at was open to him,” said Justice Zarnett, who elaborated that the language of the Insuring Agreement A(1) referred to a loss caused by the conduct of an employee, which the fidelity bond defines by reference to the position held with the insured, which Smith did not hold.

“The trial judge properly recognized that for SDC to succeed, Employee would have to mean not only an officer of SDC – the Insured making the claim for its own loss – but also an officer of a Subsidiary, BRC. In other words, SDC’s interpretation would require reading words into Insuring Agreement A(1) and the definition of Employee that are simply not there,” Zarnett’s ruling elaborated. 

Therefore that ground of appeal was also rejected.

The Court of Appeal also said the trial judge was entitled to find that SDC’s claim did not fit within the Insuring Agreement A(4). “Although SDC asserts that common sense supports its position, it fails to show any reversible error by the trial judge in concluding that its claim does not fit within the words of this Insuring Agreement and its carefully defined terms,” said the decision.

It further noted that the trial judge identified the two critical questions at issue, which were: what kind of wrongful act would engage Insuring Agreement A(4); and whose property was the subject of that wrongful act when it occurred?

Regarding the first question, said the Court, it was open to the trial judge to interpret Insuring Agreement A(4) to require that the loss occur through an actual taking of customer property, rather than another form of dishonesty that may have preceded it, such as Smith’s misrepresentations about the type of trading strategy BRC followed that induced SDC to transfer money to BRC.

On the second question, Zarnett noted that SDC advanced funds, even if those were initially raised from investors, to BRC in exchange for SDC receiving a limited partnership interest in BRC. The trial judge found that those funds then became the property of BRC.

“No error has been shown in that finding,” he determined.

The decision further stated that when Smith stole or diverted the money, the funds SDC had transferred were not customer property, because they no longer belonged to investors in SDC, or to SDC itself. “Accordingly, the theft was not of Customer Property as defined in the Bond,” said the ruling, as it also rejected that ground of appeal.

The entire SDC appeal was thus dismissed, with deliberation on the remaining two issues raised by SDC deemed unnecessary because of the conclusions reached on the three issues already deliberated.