Big Changes For Canadian Real Estate After Prominent Developers Charged With Fraud

Canadian real estate has already seen a shift behind the scenes after a regulatory failure resulted in changes to the way markets will operate. This week, the RCMP charged two prominent real estate professionals with fraud. It comes after a half-decade investigation, and a regulatory failure nearly 10-years ago. The allegations haven’t been proven, but the embarrassment already has regulators scrambling. It’s expected to have a big impact on a process that helped fuel Canada’s real estate boom.

A notice sent out by the RCMP this week notifies the public that two principles of Fortress Real Developments were been charged:   

Jawad Rathore (Markham):

  • Fraud, contrary to Section 380(1)(a) of the Criminal Code
  • Secret Commissions, contrary to Section 426(1)(a) of the Criminal Code.

Vince Petrozza (Richmond Hill):

  • Fraud, contrary to Section 380(1)(a) of the Criminal Code; and
  • Secret Commissions, contrary to Section 426(1)(a) of the Criminal Code. 

“The investigation, dubbed Project Dynasty, began in 2016 after police received a public complaint related to the business activities of Fortress Real Developments. In particular, allegations were received that the company was fraudulently obtaining investments in a syndicated mortgage investment scheme,” explains the RCMP. 

What The Heck Are Syndicated Mortgages?

Syndicated mortgage investments (“syndicated mortgages”) are mortgages with co-lenders. A group of investors pool their money and act as one big lender, for hard to finance deals. It’s essentially private lending, and has the promise of those sweet high interest payments. It’s easy to assume investors incurring losses were greedy and knew the risks, but that’s not the case. 

Syndicated mortgages sound like a scam but they actually have a legitimate purpose. Large developments require more capital than single lenders are often comfortable lending. This gets more complicated since land valuations can be based on future potential, not current value. If the lender has nothing securing the loan, it becomes too risky to justify. That’s where syndicated mortgages can come in. The issue is investors are sometimes mislead about the risks involved. Since the industry was largely unregulated, there weren’t many standards. 

FSRA, Ontario’s investment regulator, warns syndicated mortgages aren’t for the average investor. They’re often promoted as high yielding, low risk, and “fully secured.” 

“It is true that your investment will be used to create a mortgage that is registered and secured directly with the land or building associated with that mortgage. But remember, if something goes wrong with the project – and the value of the security is limited to the value of the land – you may rank behind other lenders and investors and may not get your money back. This is because the value of the land may be only enough to pay these prior-ranking lenders,” warns the FSRA. 

Canada’s Real Estate Boom Helped Fuel Fortress, and Investors Missed Red Flags

Canada’s real estate boom also led to a boom of syndicated mortgages. Fortress Developments was a big player, attracting nearly a $1 billion in investments. There were signs investors should be exercising more scrutiny, but they were muffled.

The response to a tweet from prominent analyst Ben Rabidoux was one of those red flags. Most of us would have read his comments, and likely forgotten about them in a few days. Apparently not this firm. His 2015 tweet resulted in Fortress slapping Rabidoux with a defamation suit

If you’re familiar with investments, you know analysts criticize companies. Companies that think analysts are way off either ignore or prove them wrong. Those that chose to silence critics tend to set off more alarms than those that brush off claims.

By 2016, a lawsuit was filed against Fortress by investors alleging they were misled. By 2017, an Ontario court dismissed the suit against Rabidoux as having no merit, under anti-Strategic Lawsuits Against Public Participation (SLAPP) laws.

Anti-SLAPP legislation dismisses meritless lawsuits designed to silence public criticism. A great tool if you have the money. Last I heard, Rabidoux still hasn’t been paid back.

That same year, heads were rolling at Ontario’s securities regulator for dismissing the issue. Not only had investors been demanding an investigation, but Canada’s tax authority also did. It was revealed in 2013, nearly a decade ago, the CRA asked the regulator to look into Fortress.

An investigation found documentation stating “[the CRA] suspected Fortress to be Ponzi in nature” scheme. The regulator was even scrutinized by its own compliance officer, for closing the case 1-month later. Stop laughing, Gerald.

Charges Were The Result of A Half-Decade Long RCMP Investigation

Fast forward to the charges this week, with the RCMP attributing them to the work of “Project Dynasty. ” The operation began in 2016 (!) but didn’t become public until the raids of the firm’s offices in 2018. After the raid, Canada’s national police force alleged Fortress had inflated property values and misled investors about project risks.

“It is alleged that the founders of Fortress Real Developments engaged in fraud by orchestrating an ongoing scheme whereby they did not disclose the various risks to brokers and investors,” reads this week’s charge notice from the RCMP. 

Petrozza, one of the two charged this week, came out of a 3+ year hiatus on Twitter to proclaim their innocence. 

Regardless of the outcome, Canada’s real estate industry will change drastically. The CSA, which facilitates harmonized regulation across provinces, began a syndicated mortgage framework. This has resulted in the first steps of regulating an industry that had been the Wild West.

Provincial regulators are also openly warning investors not to participate in syndicated mortgages. In Ontario, they were called unsuitable and risky for the average person. They’re currently seeking input on further regulation of the industry. Similarly, Nova Scotia warned investors that syndicated mortgages are “extremely risky.” 

Your friendly local regulator warning against an investment product isn’t great for business. This is likely to throttle capital to the industry, which might not be immediately obvious. Low rates would have helped to conceal the issue, allowing more leverage. However, as interest rates rise and markets pull back — would you, as an average person, put cash into an industry regulators warned you to stay out of?



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  • Trader Jim 2 years ago

    Like all debt, whether you’re the borrower or lender, there’s a place for use when it comes to syndicated mortgages. These should be packaged and sold in public markets though to increase liquidity and have standardized reporting, not slung by a mortgage broker that may or may not sufficient training in what these products are.

    • Marc 2 years ago

      Sophisticated investment tools like this should have to go through investment professionals that have to a have a background longer than a few weeks of classes. It’s my understanding some of the brokers sold these as RRSP-eligible investments when they clearly weren’t?

  • Ethan Wu 2 years ago

    Surprisingly tame take considering this is what people have been saying in other news sources.

    “Ray is among an estimated 14,000 investors across the country who lost about $334 million in syndicated mortgages tied to Fortress Real Developments condominium projects between 2009 and 2018 in what they call the largest mortgage fraud in Canadian history.”

  • backwardsevolution 2 years ago

    “The syndicated mortgage investments were promoted to Canadians as safe investments returning eight per cent interest…”

    Huge red flag right there. In a virtually 0% environment, if somebody came along and started offering me 8%, I’d be asking: where’s the risk hidden? Because it’s buried somewhere.

    “In April 2018, the RCMP searched Fortress offices and investors learned that 50 per cent of their principal was deducted for commissions, fees and interest. ”

    Sounds like a lot of charities, sucking the money into CEO and upper management salaries, fine furniture, expensive artwork and high rent, with hardly any going to the charity.

    This time isn’t different. There’s a lot of carnage out there. Had the government not artificially suppressed interest rates (which has created a disaster), these people would probably have been safely invested in 5 or 6% CD’s and been quite happy. I feel for them.

  • Jason 2 years ago

    There is a group of us in the Calgary area, all victims of a fraudulent developer. Who can we go to for an investigation as he continues to do the same thing all while living the high life on other peoples money. Most of us have lost every dime. Will the RCMP investigate?

    • KG 2 years ago

      It wasn’t easy to get the RCMP to investigate. They investors had to organize and pester authorities to look into it. Sure you can do the same, and it’s probably worth it if you were genuinely feel deceived by the marketing.

  • Glen 2 years ago

    From the article it seems these people and their company are not real estate developers, they are financiers, but a correct headline wouldn’t be as sexy, and create the same hype.
    Too bad accuracy is not relevant.

  • Mary 2 years ago

    The victims of the fraud suffered for the loss since they lost the principals and can’t use the loss to deduct the income tax. The law is needed to be regulated to prevent the fraudster from taking advantage of people in public who need their savings for retirement. And, government should be aware it would be a huge burden if victims have to live on the social support programs eventually.

  • John Hartley 2 years ago

    The failure of regulators and police should be right in everyone’s face. The time lines are way beyond preposterous. Folks should be fired.

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