RCMP probing syndicated mortgage fraud search offices in greater Toronto area

The RCMP’s white-collar crime team carried out six search warrants in the greater Toronto area Friday as part of an investigation into possible syndicated mortgage fraud.

While the RCMP would not disclose the target of the searches, sources confirmed they included the offices of Fortress Real Developments Inc., a real estate development company and consultant based in Richmond Hill, Ont.

Fortress officials could not be immediately reached for comment.

“If the investigation results in the laying of charges, we will advise the nature of the charges and identity of those involved,” RCMP Sgt. Penny Hermann told the Financial Post.

“As this is an ongoing investigation, no further details will be provided.”

The search warrants were obtained by the RCMP’s Integrated Market Enforcement Teams, which investigate white-collar crime.

“We can confirm that the RCMP Integrated Market Enforcement Teams carried out six search warrants in the GTA related to an investigation into the syndicated mortgage frauds,” Hermann said.

“We encourage those who have any information or have been affected by the type of fraud to call Crime Stoppers.”

In February, eight participants in Canada’s syndicated mortgage market were sanctioned by the sector’s chief regulator, part of a $1.1 million settlement that saw several lose their broker licences.

The four individual brokers and four brokerages were involved in the distribution of syndicated mortgage investments for projects linked to Fortress. While Fortress itself was not a party to the settlement or subject to any of the orders handed down by the Financial Services Commission of Ontario, the mortgage broker licence of Fortress’s chief operating officer, Vince Petrozza, was revoked on consent.

At the time, a Fortress spokesperson said Petrozza made “a business decision to consent to an order” and would be focusing on real estate development, which does not require a mortgage broker licence.

There is nothing inherently wrong with syndicated mortgages, in which groups of investors back real estate developments, and many such mortgages are funded and discharged without issue. Some of these investments fund commercial and large-scale residential real estate developments in their early stages, and projects include condominium, office and retail complexes.

According to FSCO figures, the syndicated mortgage market grew rapidly between 2014 and 2016, from $3.7 billion to $6 billion.

But the growing sector has attracted several lawsuits, which contain claims that investors were put into developments that were far riskier than they were led to believe. The claims, none of which have been proven in court, allege investors were misled about where their money was going, who had priority on returns and what recourse they had if the development ran into trouble.

Fortress Real Developments was named in a number of lawsuits filed on behalf syndicated mortgage investors, but denied any wrongdoing and moved to have the cases thrown out of court. In August, the company issued a news release that said four proposed class actions were struck out by the Ontario Superior Court, and claims against Petrozza and Fortress co-founder Jawad Rathore were dismissed on the basis that the statements of claim “did not disclose any legal causes of action against them.”

In March, Canadian securities regulators stepped in with more stringent rules for selling syndicated mortgages to retail investors, with the goal of improving investor protection. The proposals, which could come into force following a 90-day consultation period, include heightened disclosure obligations, as well as a requirement that property appraisals are prepared by a qualified appraiser who is independent.

The changes were proposed amid criticism that regulation has not kept pace with the growth of syndicated mortgages in Canada’s hot real estate market. A 2016 report to the Ontario government that called for FSCO to be overhauled singled out the syndicated mortgage market and said it was exposed to “regulatory gaps.”

Last April, the Ontario government announced that oversight of syndicated mortgages in the province would be transferred to the Ontario Securities Commission, but the transition was expected to take up to two years.