Vince Petrozza, former chief operating officer of Fortress Real Developments, leaving the company offices in 2017. Mr. Petrozza and former Fortress CEO Jawad Rathore were found guilty of fraud on Wednesday.CHRIS HELGREN/Reuters
The co-founders of now-defunct syndicated mortgage company Fortress Real Developments Inc. have been found guilty of fraud after a lengthy criminal trial.
Justice Daniel Moore told a provincial courtroom in Toronto on Wednesday that he was “satisfied beyond a reasonable doubt” that Fortress deceived investors with respect to the amount of security they were getting in its syndicated mortgage loans.
Lawyers for Jawad Rathore, Fortress’s former chief executive officer, and Vince Petrozza, its former chief operating officer, said their clients plan to appeal the Ontario Court of Justice verdict.
“We were surprised and very disappointed with the decision today. In due course, we will be bringing an appeal to seek to set aside the verdict,” said Scott Fenton, who represented Mr. Rathore, in a statement.
Mr. Rathore and Mr. Petrozza founded Fortress in 2008. The company helped to popularize the concept of bringing syndicated mortgages to the masses by allowing mom-and-pop investors to pool their funds and participate in financing early-stage real estate projects. Previously, this type of investment opportunity had been available primarily to wealthy and institutional investors.
More than 14,000 retail investors provided $920-million in financing to Fortress for 80 construction projects in cities across the country. While some of the projects were completed, others failed.
Fortress told investors that their loans were secured at specific loan-to-value ratios, an important metric used to gauge a loan’s riskiness by expressing the amount of debt as a percentage of a property’s market value.
However, those ratios were calculated based on opinions of value, which stated what the property was expected to be worth once development was complete. The actual “as is” values were withheld from investors, which “amounted to non-disclosure of material facts,” Justice Moore said.
He added: “Mr. Rathore and Mr. Petrozza are very smart, sophisticated businessmen. Their business model would have worked if [loan-to-value] was calculated on an ‘as is’ value. 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.”
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The case was heard by a judge and no jury, and sentencing has yet to be scheduled. According to the Criminal Code, fraud over $5,000, of which Mr. Rathore and Mr. Petrozza have been found guilty, carries a maximum sentence of 14 years in prison.
If the total value of the fraud exceeds $1-million, there is a minimum sentence of two years of imprisonment.
In the trial, which began in October, the defence had argued that Fortress disclosed that the investments were risky, describing them in documents as speculative.
The total amount of investors’ losses is not known. The FAAN Mortgage Administrators, the court-appointed trustee tasked with winding up the projects, has said the losses could total hundreds of millions of dollars. A group representing Fortress’s investors, Victims of Syndicated Mortgage Investments, has estimated them at $416.7-million.
Corinne Sutej, who started VOSMI, expressed relief about the decision.
“I think that the judge reiterated that we were right to feel deceived,” she said. Ms. Sutej had invested $25,000 in a Calgary project and lost 90 per cent of her investment.
When the trial began, Mr. Rathore and Mr. Petrozza had also been facing one count each of accepting secret commissions. However, the Crown dropped the secret commissions charges earlier this year.
It also narrowed its case to focus on two real estate projects from four: a proposed 45-storey tower in Winnipeg called SkyCity, and the Collier Centre in Barrie, Ont.
Ekaterina Denisevich invested $100,000 in SkyCity after being promised by an agent that her principal would be safe.
The Toronto resident invested in a handful of other Fortress projects, as well. Although one of them was completed, Ms. Denisevich estimates her total losses at $170,000 – money she had planned to give to her daughter.
“Until I see them in jail, I cannot say anything. It’s too early to be happy,” she said.