Special Report: Canada regulator ignored warnings on risky mortgage investments



TORONTO (Reuters) – In June 2014, regulators have been investigating syndicated mortgages linked to Fortress Actual Developments, a significant power in Canada’s multibillion-dollar marketplace for the dangerous investments.

Compliance officers on the Monetary Companies Fee of Ontario (FSCO) had proof that syndicated mortgages have been being marketed and bought in ways in which broke the regulation, placing the financial savings of 1000’s of Canadian mom-and-pop traders at risk. (Graphic: Scorching property – tmsnrt.rs/2AGYA8n)

Brokers affiliated with Fortress, the compliance officers had discovered, have been telling shoppers they may put their investments in retirement financial savings accounts administered by a belief firm not licensed to do enterprise in Ontario, based on three folks with direct information of the matter and inner FSCO paperwork reviewed by Reuters. The exercise, the staff decided, was a breach of provincial regulation – by brokers for recommending Olympia Belief Co, and by Olympia for working with out an Ontario license.

The compliance officers despatched their findings to FSCO investigators and later really helpful that Olympia be ordered to cease working in Canada’s most populous province, based on the sources and paperwork.

FSCO’s investigators did nothing. Their boss, Govt Director for Licensing and Market Conduct Anatol Monid, determined in Could 2015 that there was not sufficient proof to proceed, the paperwork present.

That call was half of a bigger, extra troubling sample: From 2011 to 2015, Reuters has discovered, senior FSCO investigators rejected or ignored compliance officers’ a number of suggestions that the company examine or take motion to rein within the advertising and marketing and gross sales of Fortress syndicated mortgages.

Since then, rising investor outcry concerning the merchandise has targeted public and authorities consideration on FSCO’s lax regulation of the market. Previously decade, greater than 20,000 retail traders have put as a lot as C$1.5 billion (US$1.17 billion) into syndicated mortgages, principally in Ontario, based on regulatory sources. Roughly 90 p.c of these investments, the sources mentioned, have resulted in a loss or are prone to doing so, and Fortress tasks make up greater than half of the investments.

The paperwork seen by Reuters, supported by interviews with 10 sources accustomed to FSCO’s actions, present that the company didn’t merely miss the issue; its senior investigators ignored or downplayed clear warnings from inside their very own ranks that retail traders have been being sucked right into a market to which they have been ill-suited.

As yield-hungry savers have been pouring their cash into the investments to revenue from Ontario’s red-hot actual property market, FSCO compliance workers opened a minimum of 17 Fortress-related investigations, based on the sources and inner FSCO paperwork.

In a minimum of 10 of these instances, FSCO workers discovered attainable breaches of Ontario regulation that they felt warranted motion. The breaches included deceptive advertising and marketing, promoting merchandise unsuited to shoppers’ threat tolerance, and failure to reveal the dangers and prices of the investments, amongst different infractions. And in all however one case, FSCO’s investigators both overruled or ignored the suggestions.

Why the FSCO investigation staff repeatedly declined to pursue really helpful investigations isn’t clear. Present and former FSCO workers mentioned the investigators, most of them former law enforcement officials, lacked the required abilities and information and have been discouraged by senior regulators from pursuing advanced instances.

FSCO informed Reuters it couldn’t affirm or deny the existence of any investigation. “In instances the place FSCO believes there could also be proof of non-compliance with laws and rules, FSCO conducts a radical investigation,” the company mentioned. “FSCO requires a excessive commonplace of proof and proof to take enforcement motion.”

Fortress spokeswoman Jenni Byrne mentioned in a written assertion: “Fortress will proceed to vigorously defend themselves towards false unfaithful claims.”


Paperwork seen by Reuters present that in 2013, FSCO workers opened an investigation after the federal tax collector, the Canada Income Company, despatched data it mentioned prompt that Fortress syndicated mortgages have been, in impact, a Ponzi scheme. Lower than a month later, FSCO investigators closed the file for “lack of legitimate or dependable data to help additional investigation.”

A yr later, after repeated requests to reopen an investigation into an investor’s criticism about allegedly undisclosed charges on Fortress investments, a pissed off FSCO compliance staffer wrote in an e mail: “Denied for the rationale we don’t want extra work???”

Within the Olympia episode, Monid’s choice to not proceed was all of the extra stunning as a result of FSCO had lengthy recognized that the Calgary, Alberta, belief firm was energetic in Ontario and not using a license: The company’s personal legal professionals had rejected Olympia’s requests, in 2011 and 2013, that or not it’s exempted from assembly the eligibility necessities for doing enterprise within the province, based on the paperwork.

Syndicated mortgages, which pool traders’ cash to finance building of condominiums, retirement communities and the like, aren’t suited to most retail traders. The devices sometimes fund extra speculative tasks that may’t rely solely on financial institution lending, making them comparatively high-risk even in one of the best of occasions, suited to deep-pocketed skilled traders. The dangers have solely grown as Canada’s actual property market has proven indicators of slowing, probably amplifying investor losses if extra tasks fail.

FSCO “may have eliminated this drawback earlier,” mentioned Invoice Vasiliou, a licensed fraud examiner who was accountable for regulating Ontario’s mortgage trade previous to FSCO’s creation in 1997. “There have been complaints registered, they usually buried them. They didn’t do something about it.”

The regulator’s inaction has prompted different authorities businesses to step in. Ontario’s Finance Ministry mentioned in April it deliberate to switch duty for regulating syndicated mortgages from FSCO to the Ontario Securities Fee (OSC). That change, nevertheless, may take so long as two years, based on two sources with information of the method.

Paperwork seen by Reuters additionally present that Canada’s federal police launched an investigation into Fortress’s syndicated mortgage enterprise in October 2016. Six folks informed Reuters they’d been interviewed as a part of the inquiry, led by the Built-in Market Enforcement Workforce of the Royal Canadian Mounted Police (RCMP). A police spokeswoman mentioned the company doesn’t affirm an investigation is underneath approach except prices have been laid in court docket.

Fortress spokeswoman Byrne mentioned Fortress and its workers, together with co-founders Jawad Rathore and Vince Petrozza, had not obtained any inquiries from the RCMP, and that “to one of the best of their information, they aren’t underneath investigation.”


Rathore and Petrozza, longtime figures in Toronto monetary circles, based Fortress Actual Developments in 2002. They started providing syndicated mortgage merchandise to particular person traders in 2008, a time when savers have been hungry for alternate options to traditionally low rates of interest. Each males declined to be interviewed for this text.

For the standard Fortress product, a retail investor places up a principal mortgage quantity of between C$30,000 and C$100,000 for 2 to 5 years. Throughout that point, the investor is paid common curiosity — normally round eight p.c — and on the finish of the time period, the principal must be returned.

A recurring investor criticism within the FSCO paperwork Reuters reviewed was that the merchandise weren’t what they’d been billed to be. Buyers mentioned they hadn’t been warned of the dangers, that they hadn’t been informed they may lose their principal if a undertaking failed, that they hadn’t been informed the often-advertised eight p.c returns weren’t assured, and that they hadn’t been informed Fortress and the brokers shared a 35 p.c reduce.

The complaints principally focused brokers who bought the investments. FSCO investigations into the complaints have been routinely closed with no motion taken.

A 2014 criticism, for instance, asserted dealer promoting Fortress merchandise was related to Fortress — a battle of curiosity underneath Ontario guidelines, which require brokerage agency inform traders of any relationship it has with the originator of merchandise it sells.

The investigation was closed with no motion taken. An unidentified FSCO staffer subsequently reviewing the case famous: “Nobody appeared on the disclosure paperwork or noticed the funding itself. The unlicensed exercise was famous and documented in proof uploaded to file however nobody handled it.”

Fortress payments itself as an actual property growth firm that companions with builders and different builders, offering recommendation and financing. It insists that it isn’t concerned within the advertising and marketing or sale of the syndicated mortgages that assist fund its tasks.

That’s the job of mortgage brokers, who’re “solely accountable for any advertising and marketing supplies” for syndicated mortgages, Byrne mentioned.

Fortress co-founder Rathore contradicted that place in an affidavit to the Registrar of Commerce-Marks in July 2013: “Fortress Actual Developments’ actual property growth work contains helping within the preparation of selling materials and different documentation … which is then utilized by licensed mortgage brokers and brokers within the promoting of the syndicated mortgage merchandise.”

The one occasion when FSCO did take motion straight towards Fortress was in March 2015. The company issued a letter of warning to the corporate after discovering that it was selling syndicated mortgages regardless of not being licensed as a mortgage dealer, based on emails seen by Reuters and three sources with information of FSCO’s investigations. Fortress acknowledged the unlicensed exercise and altered its web site to deliver it into compliance.

Even so, the road between Fortress and the brokerage corporations promoting Fortress investments stays blurred.

4 of the six Fortress executives named on the corporate’s web site are registered as mortgage brokers or brokers. Petrozza and two Fortress administrators are licensed mortgage brokers with Constructing & Growth Mortgages Canada (BDMC), the self-described “lead dealer” for Fortress tasks. BDMC and Fortress have the identical workplace handle in Richmond Hill, Ontario. Byrne, the Fortress spokeswoman, additionally represents BDMC.

Three different mortgage brokers – FDS Dealer Companies Inc, FFM Capital Inc and FMP Mortgage Investments Inc – market Fortress merchandise straight or by way of different brokers as their major or sole line of enterprise.

In 2011, Rathore and Petrozza settled accusations with the OSC that they’d engaged “in conduct opposite to the general public curiosity” by promoting shares to shoppers of their debt-management enterprise. They agreed to pay C$three million and have been banned from promoting securities for 15 years.

Syndicated mortgages aren’t securities, which is why they’re overseen, together with different non-securitized monetary merchandise, by FSCO, quite than the OSC.

The 2011 run-in with the OSC was why FSCO in 2013 investigated Petrozza’s utility to resume his mortgage dealer’s license, based on the three sources. His license was in the end renewed on the situation that he undertake a interval of supervision by one other dealer.

Rathore withdrew license functions in January 2012 and once more in April 2015 after FSCO workers raised considerations concerning the earlier regulatory motion, the paperwork present. He “in the end determined to proceed to give attention to actual property growth and actual property growth consulting,” Byrne mentioned.


An enormous draw for traders in syndicated mortgages is that the investments will be put in Registered Retirement Financial savings Plans (RRSPs), tax-preferred accounts much like Particular person Retirement Accounts in the US.

That’s why Barry Stevens, a 70-year-old retiree in Canada’s capital, Ottawa, invested a complete of C$150,000 in a Fortress condominium growth in Barrie, Ontario, starting in 2012.

He mentioned a dealer informed him that syndicated mortgages “gave eight p.c curiosity, each one among these is successful, there are by no means any points, and also you all the time get your principal again.” The clincher, he mentioned, was that the funding may very well be put in his RRSP.

He obtained common curiosity funds, however when the mortgage matured in October 2016, he obtained again none of his principal. Fortress representatives assured him the cash would arrive in mid-November, he mentioned. It didn’t. Fortress later informed him the developer had walked away from the undertaking.

The Fortress Actual Developments workplace is in Richmond Hill, Ontario, Canada September 5, 2017. REUTERS/Mark Blinch

Stevens now works 12 hours a day as a safety guard and hits the street at night time as an Uber driver.

Beneath Ontario regulation, RRSPs should be administered by a belief firm licensed within the province. For causes that aren’t clear, Calgary-based Olympia grew to become the supplier of so-called Registered Plan Administrative Companies (RPAS) for Fortress syndicated mortgage investments like Stevens’s.

“Fortress got here to us,” mentioned Olympia President Craig Skauge. ”They mentioned ‘Right here’s what we do. Will you guys deal with our shoppers?’ We mentioned, ‘Certain.’ ”

Skauge confirmed that Olympia was twice denied permission to offer companies to Ontario traders and not using a license. He mentioned Olympia was in a position to proceed to simply accept prospects in Ontario so long as brokers there weren’t selling the belief agency. “If mortgage brokers in Ontario have been in truth selling Olympia Belief, then FSCO ought to have finished one thing about that,” he mentioned.

Paperwork associated to FSCO’s 2014 investigation into Olympia’s function in Fortress investments present the company in truth knew Olympia’s companies have been being promoted to retail traders.

Referring to an unidentified brokerage, the file reviewed by Reuters states: “Brokers on the brokerage help with all documentation together with filling out utility kinds for Olympia.” It additional states: “Olympia Belief is the only RPAS service supplier” for Fortress syndicated mortgage investments.

Fortress mentioned traders are accountable for selecting an administrator for the retirement financial savings accounts. “Fortress doesn’t use or appoint belief corporations for syndicated mortgage loans,” Byrne mentioned.


Brokerage agency BDMC’s advertising and marketing supplies for Fortress investments notice that syndicated mortgage loans are “not with out dangers.” In 2016, it added that the loans “lack early liquidity or redemption choices” and “carry the extra dangers of building loans and actual property growth.”

It and different brokerage corporations’ promotions don’t essentially inform traders that Fortress and brokers take an enormous chunk of the cash raised, or that traders are sometimes final in line, behind banks and different establishments, to get their a reimbursement if a undertaking goes belly-up.

Buyers complained to FSCO that Fortress took 35 p.c of the funds raised, based on paperwork seen by Reuters. Of that, about half sometimes goes to brokers as commissions and costs. Trade sources mentioned that usually, brokers take between 2 and four p.c for arranging a non-public mortgage.

“I believed the cash contributed to the constructing or the prices of the development,” mentioned 31-year-old chocolatier Xiaoyi Han, who in Could 2015 put C$100,000 in a Fortress syndicated mortgage to fund a waterfront rental growth in Keswick, Ontario.

Han, who was attempting to save lots of sufficient cash to open a store of her personal, mentioned she obtained curiosity funds of C$2,000 for 3 quarters. Then the funds stopped, she mentioned, and her principal was not returned when the mortgage matured. In line with the Fortress web site, building crews are actually engaged on the constructing’s foundations.

Han mentioned federal police interviewed her as a part of their investigation. She mentioned she complained to FSCO concerning the funding on June 27. The regulator acknowledged the criticism and mentioned it might examine. She has not heard again.

FSCO declined to touch upon Han’s case.

Two complaints despatched to FSCO in 2014 targeted on the excessive charges. In each instances, the information have been closed inside three weeks with none motion taken.


At FSCO headquarters within the North York part of Toronto, a staff of about 10 compliance officers evaluation complaints about monetary corporations working in Ontario. In the event that they determine a criticism warrants additional motion, they “open a file” and move it to FSCO’s seven-man investigations unit, headed by Director of Investigations Terry Weller.

Weller was an officer for 18 years with the Toronto Police Service, the place he was assigned to a number of investigative places of work, earlier than he moved into monetary regulation in 1990. His staff is made up of former police with little prior expertise within the monetary companies trade, based on two former and one present FSCO worker.

Weller experiences to Monid, the licensing and market conduct chief. He spent 15 years in Canada’s armed forces and three years as an insurance coverage firm regulator earlier than becoming a member of FSCO in 2005. He took up his present function in 2014.

Workers have been inspired to not query Monid’s selections, two former FSCO staffers informed Reuters. “We’d write many experiences that we consider weren’t acted upon,” one of many former workers mentioned.

Vasiliou, the previous Ontario regulator, mentioned FSCO lacks the mandatory abilities and expertise in-house to successfully supervise advanced monetary merchandise like syndicated mortgages. “They need to have employed individuals who may cope with the trade, and who perceive the trade and have been completely versed within the laws,” he mentioned.

In an e mail to Reuters, FSCO rejected that assertion: “FSCO workers have the requisite information, abilities, expertise, coaching, and help to control the syndicated mortgage market.”

Complaints from different authorities businesses fared no higher with FSCO than these from traders.

In July 2013, FSCO opened a file after the Canada Income Company “had suggested (FSCO authorized counsel Joe) Nemet they suspected Fortress to be Ponzi in nature,” an inner FSCO e mail states.

The file was closed lower than a month later. Investigators wrote: “In conclusion there isn’t any legitimate or dependable data to help additional investigation of the (Ponzi) allegations. It is strongly recommended no additional motion be initiated.” Monid concurred, the paperwork present.

The Canada Income Company declined to remark.


By 2015, investor complaints and official concern about syndicated mortgages have been rising.

In Could that yr, FSCO Chief Govt Brian Mills known as a gathering of senior workers, together with Monid and Weller, after Ontario Finance Minister Charles Souza requested data on the merchandise, based on the three folks accustomed to FSCO investigations. Mills reacted to the presentation by FSCO staffers with shock, saying, “This has obtained greed written throughout it,” based on an individual who attended the assembly.

Investigations chief Weller, the individual mentioned, responded that there was “loads of smoke, however I’m undecided if there’s any hearth.”

FSCO spokeswoman Jenna LeBlanc mentioned Mills had no reminiscence of what was mentioned on the assembly.

In a briefing notice for the assembly, reviewed by Reuters, FSCO workers introduced an extended checklist of suggestions to beef up oversight and investigations of the syndicated mortgage enterprise. Amongst them: that FSCO ship a cease-and-desist order to Olympia Belief to cease it from accepting new accounts for syndicated mortgage investments from Ontario residents. That’s when Monid determined there was not sufficient proof to proceed, inner FSCO emails present.

Across the identical time, Steve Dowling, the highest securities regulator for Prince Edward Island, contacted a FSCO compliance officer to ask concerning the merchandise. Residents of his small province who had purchased in, he mentioned, have been fearful that they’d misplaced their cash.

In a subsequent memo to Dowling, the compliance officer wrote that syndicated mortgages have been being “funded by on a regular basis customers – mother and pop traders. The advertising and marketing is heavy hitting and really shiny. … The hook is that they’re registered underneath a self-directed RRSP.”

In an October 2015 e mail seen by Reuters, a FSCO compliance officer famous that “17 information of significance” had been opened regarding Fortress, Rathore and Petrozza since March 2011, and that each one had been closed with out direct motion taken towards Fortress.

The identical e mail notes “proportion of the syndicated mortgage funding is put aside to pay traders’ curiosity” making the investments “Ponzi like in nature.”

In an August 2016 posting on its web site, FSCO warned customers to be cautious of syndicated mortgage investments “with commercials selling a excessive return or ‘absolutely secured’ funding.”

FSCO in October final yr suspended the operations of three smaller corporations promoting syndicated mortgage investments, citing two of them for “systemic disregard” of primary shopper safety points. Particular causes cited included failure to offer written disclosure of fabric threat, failure to reveal conflicts of curiosity, failure to make sure the suitability of the investments for traders, and offering false and deceptive data.

After asserting in April that regulation of syndicated mortgage investments can be shifted from FSCO to the OSC, Ontario’s Ministry of Finance in August moved to restrict traders’ publicity to the merchandise, recommending an annual cap of C$25,000. Regulatory sources mentioned any modifications are a minimum of six months away.

And in July, after Reuters started making inquiries about Fortress syndicated mortgages, FSCO despatched an e mail reminder to brokers and brokers: “You can’t promote the companies of a mortgage and belief firm except they’re registered in Ontario,” it mentioned.

In an Aug. 24 e mail to Reuters, FSCO mentioned the reminder “was a results of a voluntary cessation of syndicated mortgage enterprise by a belief firm not licensed in Ontario after session with FSCO.”

FSCO subsequently confirmed to Reuters that the corporate was Olympia Belief, which had agreed that from Aug. four, 2017, it might stop accepting new registered accounts for syndicated mortgage investments from Ontario residents.

Skauge, the Olympia Belief president, mentioned the corporate agreed to the choice after FSCO raised questions with it concerning the “trade’s practices in Ontario.”

“This market grew sooner than FSCO was in a position to deal with,” he mentioned.

(For a graphic, click on on tmsnrt.rs/2AGYA8n)

Edited by Carmel Crimmins and John Blanton

Our Requirements:The Thomson Reuters Belief Rules.


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