The co-founders of the failed Fortress Real Developments Inc., one of the first Canadian companies to offer higher risk, syndicated mortgage products to retail investors, have been charged with fraud.
Jawad Rathore, Fortress’s former chief executive officer, and Vince Petrozza, the company’s former chief operating officer, were each charged with one count of fraud and one count of accepting secret commissions.
The RCMP news release did not detail the allegations, which have not been proven in court. Both men say they will fight the charges.
More than four years ago, officers from the RCMP’s Integrated Market Enforcement Team executed a search warrant on Fortress’s head office after investors said they suffered heavy losses and alleged that the risks involved in their investments were not fully explained.
The exact size of the losses is not known, but a court-appointed trustee tasked with winding up Fortress’s projects says they could total hundreds of millions of dollars and affect a large number of people.
Mr. Rathore and Mr. Petrozza founded Fortress in 2008 to help developers raise money for new real estate projects. Through affiliated mortgage brokerage firms, more than 14,000 retail investors provided $920-million in financing for dozens of major developments in cities across Canada. Fortress popularized the concept of bringing syndicated mortgages to the masses – allowing regular people to pool their funds and get in on the financing of early-stage developments, a type of investment usually reserved for institutional and wealthy investors.
Many investors have alleged they were promised high rates of return and told the investments were low risk because they were secured by property. But after some Fortress projects failed to perform, many investors said they had not understood that their syndicated mortgage would rank behind other secured mortgages on the properties for repayment.
About a week after the RCMP search, an Ontario court put the trustee, FAAN Mortgage Administrators, in charge of Fortress’s mortgage brokerage affiliate at the request of a provincial regulator. At that time, about $560-million in investors funds were backing 45 Fortress-affiliated real estate development projects.
FAAN said in January in its most recent report to the court: “Many investors have experienced significant hardship as a result of their investments in Fortress-affiliated projects and [FAAN] understands that many of the investors have suffered and will continue to suffer a devastating financial impact from such investments, collectively reaching hundreds of millions of dollars.”
The criminal charges laid by the RCMP will set up a court fight about whether those losses are simply the result of a risky investment that people were fully apprised of, or whether they were misled by a network of brokers and agents for whom Mr. Rathore and Mr. Petrozza bear responsibility.
Scott Fenton, a defence lawyer for Mr. Rathore, said in an e-mailed statement that Fortress followed all of the necessary disclosure requirements in its documentation and did not directly engage with investors. That was the responsibility of brokers and agents who promoted Fortress syndicated mortgage products, some of which were sold out of Toronto strip malls.
“This was a flawed investigation dogged by tunnel vision from the outset,” Mr. Fenton said. “There is no reasonable prospect of a conviction. We look forward to establishing Mr. Rathore’s innocence.”
The lawyer for Mr. Petrozza, Gerald Chan, offered a similar statement: “We are confident that when the evidence is revealed, it will show that there was no fraud and no secrecy. Mr. Petrozza is innocent of the charges and we look forward to his day in court.”
But critics of Fortress, including lawyers representing investors, have said those brokers were hardly independent of Fortress, pointing out that many of them previously worked for Fortress, or the company’s in-house mortgage brokerage subsidiary, Building & Development Mortgages Canada Inc.
In documents filed in court in support of their 2018 search warrant, the RCMP said two of those brokerages were helmed by officials who were also vice-presidents at Fortress Real Capital, the company’s investment arm.
Mr. Petrozza and Mr. Rathore are scheduled for their next court appearance on Aug. 3 at Old City Hall in Toronto.
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