A couple of the men behind the failed syndicated mortgage firm Fortress Real Developments Inc. — Jawad Rathore and Vince Petrozza — have been found guilty by a judge of criminal fraud charges.
In 2020, the firm — which reportedly raised $900 million from investors between 2008 and 2017 to finance various real estate projects — was sanctioned by the Financial Services Regulatory Authority of Ontario (FSRA) in a settlement for breaching mortgage rules, after a number of its projects failed and investors lost money.
In 2022, following an investigation by the RCMP’s Integrated Market Enforcement Team, the company’s founders, Rathore and Petrozza, were charged with fraud in connection with the failed investments. Now, the pair has been convicted.
In its decision, the Ontario Court of Justice said the Crown had two basic theories of how investors were defrauded in the Fortress case — that they failed to disclose certain upfront fees, and that the value of properties the firm was investing in was misrepresented to investors.
The court rejected the theory that the lack of fee disclosure amounted to fraud.
Among other things, it noted that the borrowers paid Fortress’s fees, and that these fees didn’t reduce the amounts owed to lenders.
While the disclosure of the fees was somewhat deficient, the court found “that there was no obligation to disclose the fees at all. The fees were a matter between Fortress and the borrower.”
As a result, it rejected the argument that Rathore and Petrozza committed fraud by failing to properly disclose fees.
However, when it came to the question of property valuations, the court found that investors were defrauded.
“I am satisfied beyond a reasonable doubt that Fortress’ use of the opinions of value and [loan-to-value] ratios based on them included falsehoods … deceived investors with respect to the actual security they were being given in the [syndicated mortgage loans], and that the non-disclosure of the actual ‘as is’ value that was known to Fortress amounted to non-disclosure of material facts,” it said.
These valuation issues “created a risk of deprivation” for investors, the court said — and, while they weren’t the sole cause of investor losses, they did contribute to actual investor losses, it found.
“Mr. Rathore and Mr. Petrozza are very smart, sophisticated businessmen. They designed these transactions,” it said. “I find beyond a reasonable doubt that they both intentionally misled investors about the value of their secured interest in order to induce them into investing.
“While they likely hoped that all the projects would be successful and the investors would be paid back, I find beyond a reasonable doubt that they knew they were putting investor funds at risk,” it said.
In the wake of the firm’s collapse, investors have recovered some money through a series of class actions that have been settled, which have garnered over $30 million for investors.