Fortress Real Developments Inc. has agreed to pay $250,000 for violating Ontario mortgage rules in the first direct penalty against the troubled construction finance company.
Between 2009 and 2017, Fortress helped raise $920-million for developers by facilitating the sale of syndicated mortgage investments to thousands of retail investors. On Thursday, the Financial Services Regulatory Authority of Ontario (FSRA) said the company broke the province’s mortgage rules a dozen times by providing financing services to borrowers without being licensed to do so.
Fortress had previously contested the allegations, but dropped its request for a hearing last month and agreed to a settlement. Regulators had already fined four mortgage brokerages associated with Fortress $1.1-million in 2018, but Fortress itself was excluded from the earlier settlement.
“Fortress is pleased that this matter is resolved,” said Brendan van Niejenhuis, a lawyer acting for Fortress, in an e-mailed statement. Mr. Niejenhuis noted that the FSRA “did not assert or identify any harm caused to any borrower or lender as a result of the contraventions” of the mortgage act.
The “administrative penalty” announced on Thursday is the first time the Richmond Hill, Ont.-based company has been penalized by a regulator for business practices that investors say resulted in massive losses. The company is also being investigated by the RCMP, which launched a large-scale fraud investigation in 2016 and raided the company’s offices in 2018.
In a search warrant application from 2018, RCMP investigators alleged that Fortress misled investors about land valuations for several projects in order to raise more money. The company has denied the allegations. The RCMP declined to comment on the status of the investigation. No charges have been laid.
At its peak, Fortress was Canada’s largest syndicated mortgage company. It led the transformation of what had once been a high-risk investment vehicle for wealthy investors into a mainstream one sold to ordinary Canadians.
By offering generous returns to investors, and attractive commissions to mortgage brokers, Fortress helped raise money from 14,000 investors to finance major real estate developments across the country, such as the Collier Centre in Barrie, Ont., and the SkyCity condo project in Winnipeg.
Many of these real estate projects, however, were never completed, and retail investors who helped finance them have struggled to recover their investments. Lenders and receivers have begun to put the sites up for sale, but say they cannot raise enough money to repay syndicated mortgage lenders, who typically have the lowest-priority claims behind secured lenders.
The full extent of investor losses is still being determined, said Darryl Levitt, a lawyer who has done a forensic review of Fortress’ business in preparation for potential lawsuits.
“The projects we have investigated clearly will not recover anywhere near 100 per cent of the cost of the projects," he said.
“I’m not going to say that they’re all not going to be paid off. But what I can tell you is that there are a number of projects that clearly are not going to be paid off, and those run into hundreds of millions of dollars."
Several class action lawsuits have been launched against Fortress on behalf of retail investors looking to recoup losses. To date, none has been certified. Mr. Levitt said Fortress itself likely does not have enough money “to satisfy any kind of reasonable settlement or a judgment.”
David Franklin, another lawyer representing aggrieved investors, said the $250,000 fine from the FSRA was “ridiculous," and “not proportionate at all" given the amount of money Fortress' owners made selling syndicated mortgages.
Regulators began reviewing Fortress and its associated mortgage brokerages in 2017, leading to the $1.1-million settlement in 2018 and the smaller settlement announced this week. Reporting by The Globe and Mail found that the Financial Services Commission of Ontario, which was overseeing mortgage regulation at the time, first received complaints about mortgages and brokers with ties to Fortress as early as 2011.
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