The principals of the Paramount group, which sold pooled mortgage products until it was shut down in 2017, defrauded investors by directing their funds into speculative real estate projects in which the executives had a financial interest, a majority of panelists of the Ontario Securities Commission has found.
Paramount and its affiliate companies, which were placed under the control of a receiver at the request of the OSC, promoted themselves as a vehicle for investing in second mortgages on residential homes, and it raised about $78-million from 500 investors for its two funds.
OSC enforcement staff alleged, however, that about $50-million was directed to higher-risk mortgages for undeveloped land, or the redevelopment of existing buildings. The OSC also alleged that the principals of Paramount – chief executive officer Marc Ruttenberg, senior vice-president Brad Burdon and director of sales Matthew Laverty – had undisclosed, indirect ownership interests in these riskier development projects.
A hearing on possible sanctions has yet to be scheduled.
In a decision released Tuesday, two of the three OSC panelists adjudicating the case said the three men, as well as several Paramount companies, committed fraud under the securities act.
“Investor funds were used in a way that was not disclosed, and to the personal benefit of the principals instead of to the benefit of investors,” commissioners Timothy Moseley and Garnet Fenn ruled. The two commissioners also found that the men traded in securities without registering with the OSC and failed to field a prospectus.
However, the third panelist presiding over the hearing, Heather Zordel, dissented, finding that, of the trio, only Mr. Ruttenberg had defrauded investors.
Ms. Zordel said that, although Paramount’s offering memorandum specified investor funds would be used for second mortgages on residential properties and that a large portion of those funds were used for different kinds of real estate investments, that was not sufficient to lead to a finding of fraud.
“The offering memorandum is a business plan and road map. It explains what a corporation intends to do with funds. Sometimes plans change and things do not happen as expected,” she wrote. “In my view, that does not mean the offering memorandum and related materials are inherently fraudulent.”
Mr. Ruttenberg, she found, wielded control over the business and should be the sole individual held liable for the misrepresentations – not his business partners. “Ruttenberg was the main source for verbal representations to investors, not Laverty or Burdon,” she wrote.
In her dissent, Ms. Zordel also cleared the Paramount companies of any allegation of fraud, writing that they were potentially the victims of a fraud perpetrated by Mr. Ruttenberg.
Ms. Zordel is the proposed incoming chair of the new board of directors of the OSC, which has been revamped by Ontario’s Progressive Conservative government.
Under this new structure, which is due to be implemented later this month, the OSC will have a board overseeing the regulator, and a separate body of adjudicators presiding over enforcement hearings. Mr. Moseley is the government’s proposed first chief adjudicator.
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