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A suburban office building home to Fortress Real Developments Inc., on Dec. 11, 2018.

Fred Lum/Globe and Mail

A group of investors says Ontario’s mortgage regulator bears some of the blame for losses linked to investments in Fortress Real Developments Inc. and is calling on the provincial government to pay restitution.

Toronto lawyer David Franklin, who has been representing a group of investors who have not been repaid money invested in Fortress syndicated mortgages, said the investors want the province to help them because its mortgage regulator, the Financial Services Commission of Ontario, took far too long to act on years of complaints about mortgage investments. He said the group is also contemplating legal action against FSCO if they cannot recover their money. Syndicated mortgages are mortgages funded by more than one investor, typically to finance new real estate developments.

Canadian law makes it difficult to sue a regulator when investors have lost money unless they can prove evidence of overwhelming negligence by the regulator. However, Mr. Franklin believes FSCO was negligent in this case because it failed to act on many signs of problems with the sale of syndicated mortgages.

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“People have been defrauded – these are their life savings," Mr. Franklin alleged. "All these people put their money in because they thought they were safe, secure investments, and they’ve lost their retirement money. They are saying that if FSCO had done its job, this wouldn’t have happened.”

Mr. Franklin said the province’s Auditor-General has previously flagged concerns about FSCO’s operations, and an independent review panel appointed by the province to study financial regulation issued a report in 2016 recommending replacing FSCO with a new independent regulator.

Globe investigation: Inside the fall of Fortress

Opinion: Regulators leave Fortress investors exposed to mortgage industry Wild West

Fortress has denied any wrongdoing in promoting the mortgages and says it has broken no laws. FSCO has also defended its work, saying it investigated complaints it received, issued repeated warnings on its website about the risks of syndicated mortgages and introduced new syndicated mortgage sales rules.

Robert Gibson, a spokesman for Ontario Finance Minister Vic Fedeli, said in an e-mailed statement that the government is taking action to create the Financial Services Regulatory Authority, which will replace FSCO. As part of the change, he said the province will also transfer oversight of syndicated mortgage investments to the Ontario Securities Commission, but said he could not provide a date when the transfer will occur. “We will have more to say on this in the future," he said.

Mr. Gibson also said Doug Downey, parliamentary secretary to the Finance Minister, was appointed in October to lead a review of Ontario’s mortgage brokerage legislation.

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Fortress helped real estate developers raise $920-million from 14,000 ordinary investors between 2008 and 2017. The money was used to provide mortgages on new development projects, particularly condominium developments. Many investors are now complaining much of their money has not been repaid and their projects have been halted. The RCMP searched Fortress’s offices in April as part of an investigation into syndicated mortgage fraud, but no charges have been laid.

Mr. Franklin said one of his concerns with FSCO’s oversight was its handling of Olympia Trust, a Calgary-based trust company that opened accounts for Fortress mortgage investors in Ontario, even though it was not licensed to operate in the province.

Investors who want to invest RRSP money in a syndicated mortgage can only do so if the investment is held in a registered account at a trust company. As a result, Fortress struck a deal with Olympia Trust, which agreed to set up registered accounts for investors to hold their syndicated mortgage investments.

Although Olympia Trust was not licensed to operate in Ontario, the company says it was not in breach of the law for opening the accounts. Olympia Trust president Craig Skauge said the company was not allowed to market or promote its business in Ontario, and it didn’t do so. Instead, he said, it opened accounts for Ontario residents without doing any marketing or advertising.

“Fortress sought us out − they came to Alberta to meet with us," he said. “We’re not licensed in Ontario, but that doesn’t prohibit us from doing business with Ontario companies that come to us.”

Olympia Trust wanted to become licensed in Ontario, but withdrew from the process because it would have required the company to also be regulated by Canada’s federal banking regulator, Mr. Skauge said. The company later applied for the right to market its business in Ontario while not licensed in the province, but FSCO did not approve the plan.

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FSCO announced an agreement with Olympia Trust in 2017, under which the company agreed to stop opening new registered accounts in Ontario as of Aug. 4, 2017, if the accounts were to be used for syndicated mortgage investments. There was no penalty imposed, however.

FSCO said it is committed to protecting consumers, but also has to be able to prove a case to take enforcement action. “FSCO requires a high standard of proof and evidence to take enforcement action against an individual or entity,” the regulator said in a written response to questions about Olympia Trust.

Mr. Skauge said FSCO asked Olympia Trust to halt new business in 2017, and the company agreed because it did not want to fight with the regulator, and was unhappy with its relationship with Fortress.

“We had had enough. We saw the path that things were headed down. We were starting to get a lot of customer inquiries that left us uneasy," he said.

Meanwhile, several investors told The Globe and Mail they are upset about paying account fees to Olympia Trust for investments where they fear they have lost all their money. Wendy and Roberto Nember said they are still paying Olympia Trust fees on their TFSA investment accounts for a syndicated mortgage for Fortress’s Crestview Commons development in Mississauga. Mr. Nember said “our fees are just piling up,” totalling $420 this year.

The Nembers have received a letter from Olympia Trust reminding them they are still responsible for paying their fees, yet no returns are coming in.

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Mr. Skauge, however, said Olympia Trust is waiving fees for some investors if the project is “completely underwater” and investors ask for relief, but said the firm will not write off fees in all cases.

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