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Osgoode Hall in Toronto, which hears cases before the Ontario Superior Court of Justice.

Colin N. Perkel/The Canadian Press

The court-appointed receiver for Paramount Financial Equity Corporation, which sold investments in pooled mortgage funds until its collapse in 2017, is suing a Toronto-area developer, alleging that he improperly diverted $18.8-million from Paramount-funded projects for his “personal benefit.”

The receiver for Paramount has also launched a claim against a Bay Street lawyer and his firm, alleging that they were in a conflict of interest and neglected to warn Paramount that it was in violation of securities laws.

The two claims are the latest effort by the receiver, Grant Thornton Limited, to recover what it can from the wreckage of Paramount, which was put in receivership at the request of the Ontario Securities Commission in 2017.

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Starting in 2014, Paramount raised $115-million from 500 retail investors who were told that their money would fund second residential mortgages, court filings state. Marketing material for Paramount’s funds described the investments as “low volatility,” providing “predictable, steady returns,” and as a “high-returning annuity/GIC alternative,” the OSC has alleged.

However, Paramount was not registered to sell such securities. The receiver has alleged that Paramount lent 67 per cent of its funds to speculative, undeveloped commercial projects that would take many years to produce regular income and that, in some cases, those loans were secured by third and forth mortgages. The receiver determined that $50-million of those speculative loans went to companies associated with Enzo Mizzi – a Toronto-area developer, landlord and construction company owner.

Last week, Grant Thornton sued Mr. Mizzi and a number of companies linked to him, alleging that they failed to use the funds advanced by Paramount for their stated purpose. In particular, Grant Thornton alleges that Mr. Mizzi “caused" $18.8-million to be redirected from those loans, which were provided to fund the building of six proposed developments, to “related companies for his personal benefit.”

None of the allegations against Mr. Mizzi have been proven in court. Mr. Mizzi’s lawyer, Michael Simaan, said that neither he, nor Mr. Mizzi, have been served with the claim. (The Globe and Mail obtained the claim at a Toronto office of the Ontario Superior Court of Justice on Dec. 6.)

“Obviously we can’t comment upon a claim that we haven’t yet received but I can say that I am 100 per cent certain that we will be defending the claim as Mr. Mizzi certainly does not believe that he has done anything wrong,” Mr. Simaan said in an e-mail.

The receiver alleges that despite the loans advanced, little to no construction work was performed on some of the projects. In the case of a two-acre site in Penetanguishine, Ont., which housed an 88-suite retirement residence, renovations had “not progressed despite the $5.7-million of advances made by the Paramount Group,” the claim alleges.

“Mizzi and companies owned and/or controlled by him misappropriated the substantial majority of the funds advanced,” the claim alleges.

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In 2017, the lender behind the property’s first mortgage sold it under power of sale. “The sale did not generate any recovery for the Paramount lenders,” the claim alleges.

Another company controlled by Mr. Mizzi received $21.8-million in loans from Paramount to purchase, renovate and develop a seven-acre plot of land in north Toronto, the claim alleges. The property houses the Toronto Plaza Hotel. The hotel, through agreements with the City of Toronto, has been used to shelter refugees.

When Grant Thornton was appointed receiver over the company that owns the land in 2018, it learned that the property “was in a substantial state of disrepair and the renovations and development were barely, if at all, advanced,” the claim alleges.

Grant Thornton alleges that Mr. Mizzi “caused” the company that owns the hotel property “to divert” $12.4-million to four other companies controlled by him.

Grant Thornton sold the property this year. Paramount investors suffered a loss of $14.2-million, the claim states.

In addition to the claim against Mr. Mizzi, Grant Thornton has also sued Paramount’s lawyer, Barry Polisuk, a partner with Garfinkle Biderman LLP, and the firm itself.

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None of the allegations against Mr. Polisuk and Garfinkle Biderman have been proven in court. In a statement, Mr. Polisuk said: “Myself and Garfinkle Biderman intend to defend this vigorously and be fully vindicated because we did absolutely nothing wrong.”

The claim alleges that Mr. Polisuk and his firm were aware that Paramount’s investment objectives were for investments in second residential mortgages. Nonetheless, Mr. Polisuk and his firm prepared the documentation for the “Mizzi transactions,” the claim alleges.

“These loans were not consistent with the stated investment objectives of the Paramount Group,” it alleges.

The claim also alleges that Mr. Polisuk and his firm neglected to properly warn Paramount that it was in violation of Ontario securities legislation. Finally, Grant Thornton has alleged that the lawyer and his firm were in a conflict of interest, “as they were acting for both the Paramount Group as a lender, and the Mizzi Borrowers as borrowers.”

The claim alleges that Mr. Polisuk and his firm “preferred the interests of their client, Mr. Mizzi, over the interests of their client, Paramount Group. In doing so, the Defendants contributed to the failure of the Paramount Group and the loss of millions of dollars of innocent investor monies.”

In 2018, the Law Society of Ontario suspended Mr. Polisuk’s licence to practice law for one month after he was found to have committed professional misconduct in a matter unrelated to Paramount. Among the findings against him was a ruling that he had acted in a conflict of interest in a 2010 transaction, the law society’s website states.

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