RCMP officers searched the head office of real estate developer Fortress Real Developments Inc. on Friday morning as part of a syndicated-mortgage fraud investigation.
RCMP Sgt. Penny Herman confirmed Friday that officers from the RCMP’s Integrated Market Enforcement Team carried out search warrants related to its investigation at six locations in the Greater Toronto Area on Friday morning.
At Fortress’s head office in Richmond Hill, north of Toronto, an RCMP cruiser was parked out front while officers, who were still inside the building as of mid-morning, were seen removing a box of materials and putting it into the car.
Sgt. Herman said the search warrants are related to an investigation into “syndicated mortgage frauds,” but would provide no additional details. Syndicated mortgages are pools of money provided by private investors to finance real-estate-development projects.
“If the investigation results in the laying of charges, we will advise the nature of the charges and the identity of those involved,” she said. “As this is an ongoing investigation, no further details will be provided.”
Sgt. Herman said the RCMP is encouraging people with information or who have been affected to contact Crime Stoppers or the RCMP.
Officials from the company did not respond to requests for comment.
Fortress, founded in 2002 by chief executive officer Jawad Rathore and chief operating officer Vince Petrozza, is a real estate development company that partners with builders on new projects focused primarily on the condominium sector.
The company’s website says it is developing or has completed 80 projects with a value of $6-billion, with 27 of them complete. Fortress says it has partnered with more than 25 builders across five provinces, and said it has 20 projects under construction.
The company told Reuters last fall that it does not market or sell the syndicated mortgages that help finance its projects.
However, Fortress has faced questions from Ontario’s financial regulator in its review of syndicated-mortgage loan practices.
The Financial Services Commission of Ontario (FSCO) revoked Mr. Petrozza’s mortgage broker licence, as well as the licences of three other people, in early February following an investigation into risky syndicated-mortgage investments. A fifth person voluntarily surrendered her licence.
The financial services regulator said it reached a settlement agreement with four individuals – including Mr. Petrozza – and four companies, all involved with syndicated-mortgage investments related to real estate projects where Fortress was the developer or development consultant. The companies agreed to pay $1.1-million to settle the case.
FSCO, which licenses mortgage brokers, said Fortress itself was not a party to settlement deal. Fortress develops real-estate projects but is not a mortgage broker.
Syndicated-mortgage loans have become a focus for regulators amid complaints from investors that they have lost large sums on what they thought were safe investments used by real estate developers to finance new projects.
In typical syndicated-mortgage loans, individual retail investors help finance mortgage loans and receive interest payments on the debt, providing a stream of income. But many investors have complained they aren’t told about the risks of the projects, including the possibility the interest payments may be suspended or that they can lose their principal if the projects fail.
Regulators have also probed potential conflicts of interest in the sector when the mortgage brokers who pitch the loans to investors also have an interest in the development companies receiving the loans to finance their projects.
A Reuters investigation published in November quoted an unnamed regulatory source saying 90 per cent of the roughly $1.5-billion in syndicated mortgage investments in Canada over the past decade have ended in a loss or are at risk of doing so – and Fortress projects make up more than half of the investments.
One of the companies included in the recent FSCO settlement involving Fortress loans was Building & Development Mortgages Canada Inc. (BDMC), which was the lead broker for Fortress projects. Mr. Petrozza was previously licensed as a mortgage broker with BDMC, which lists the same office address in Richmond Hill as Fortress.
As part of the February settlement agreement, BDMC agreed that its outstanding syndicated mortgage investments in Fortress projects will be managed by an arms-length administrator, FAAN Mortgage Administrators Inc., which will conduct business in BDMC’s name.
According to FAAN’s website, it has taken control of 65 of BDMC’s syndicated mortgage loans for Fortress projects in Ontario, Manitoba, Saskatchewan and Alberta. FAAN will collect funds from borrowers and make payments to lenders, and said it will also take enforcement action where loans are in default.
BCMC said in a statement in February that it has raised $920-million for real estate projects from 14,000 investors.
Canadian securities regulators published proposed new guidelines and closer oversight of the syndicated mortgage sector in March, saying the investments raise investor-protection concerns.
The Ontario government has announced plans last year to transfer responsibility for regulating syndicated mortgages from FSCO to the Ontario Securities Commission to beef up enforcement, but the timeline for the transfer has not been announced.