In June 2014, regulators were investigating syndicated mortgages linked to Fortress Real Developments, a major force in Canada's multibillion-dollar market for the risky investments.

Fortress is the company behind Winnipeg's St. Regis Hotel redevelopment and SkyCity — the 45-storey mixed use condo building that's planned to be built on Graham Avenue between Smith Street and Garry Street.

Compliance officers at the Financial Services Commission of Ontario (FSCO) had evidence that syndicated mortgages were being marketed and sold in ways that broke the law, putting the savings of thousands of Canadian mom-and-pop investors in danger.

Brokers affiliated with Fortress, the compliance officers had found, were telling clients they could put their investments in retirement savings accounts administered by a trust company not licensed to do business in Ontario, according to three people with direct knowledge of the matter and internal FSCO documents reviewed by Reuters. The activity, the team determined, was a breach of provincial law — by brokers for recommending Olympia Trust Co, and by Olympia for operating without an Ontario license.

The compliance officers sent their findings to FSCO investigators and later recommended that Olympia be ordered to stop operating in Canada's most populous province, according to the sources and documents.

FSCO's investigators did nothing. Their boss, Executive Director for Licensing and Market Conduct Anatol Monid, decided in May 2015 that there was not enough evidence to proceed, the documents show.

That decision was part of a larger, more troubling pattern: From 2011 to 2015, Reuters has found, senior FSCO investigators rejected or ignored compliance officers' multiple recommendations that the agency investigate or take action to rein in the marketing and sales of Fortress syndicated mortgages.

Since then, growing investor outcry about the products has focused public and government attention on FSCO's lax regulation of the market. In the past decade, more than 20,000 retail investors have put as much as C$1.5 billion (US$1.17 billion) into syndicated mortgages, mostly in Ontario, according to regulatory sources. Roughly 90 percent of those investments, the sources said, have ended in a loss or are at risk of doing so, and Fortress projects make up more than half of the investments.

The documents seen by Reuters, supported by interviews with 10 sources familiar with FSCO's activities, show that the agency didn't merely miss the problem; its senior investigators ignored or downplayed clear warnings from within their own ranks that retail investors were being sucked into a market to which they were ill-suited.

'[T]o the best of their knowledge, they are not under investigation.' - Fortress spokesperson

As yield-hungry savers were pouring their money into the investments to profit from Ontario's red-hot real estate market, FSCO compliance staff opened at least 17 Fortress-related investigations, according to the sources and internal FSCO documents.

In at least 10 of those cases, FSCO staff found possible breaches of Ontario law that they felt warranted action. The breaches included misleading marketing, selling products unsuited to clients' risk tolerance, and failure to disclose the risks and costs of the investments, among other infractions. And in all but one case, FSCO's investigators either overruled or ignored the recommendations.

Why the FSCO investigation team repeatedly declined to pursue recommended investigations isn't clear. Current and former FSCO staff said the investigators, most of them former police officers, lacked the required skills and knowledge and were discouraged by senior regulators from pursuing complex cases.

FSCO told Reuters it could not confirm or deny the existence of any investigation. "In cases where FSCO believes there may be evidence of non-compliance with legislation and regulations, FSCO conducts a thorough investigation," the agency said. "FSCO requires a high standard of proof and evidence to take enforcement action."

Fortress spokeswoman Jenni Byrne said in a written statement: "Fortress will continue to vigorously defend themselves against false untrue claims."

Impatience within

Documents seen by Reuters show that in 2013, FSCO staff opened an investigation after the federal tax collector, the Canada Revenue Agency, sent information it said suggested that Fortress syndicated mortgages were, in effect, a Ponzi scheme. Less than a month later, FSCO investigators closed the file for "lack of valid or reliable information to support further investigation."

A year later, after repeated requests to reopen an investigation into an investor's complaint about allegedly undisclosed fees on Fortress investments, a frustrated FSCO compliance staffer wrote in an email: "Denied for the reason we don't need more work???"

In the Olympia episode, Monid's decision not to proceed was all the more surprising because FSCO had long known that the Calgary, Alberta, trust company was active in Ontario without a license: The agency's own lawyers had rejected Olympia's requests, in 2011 and 2013, that it be exempted from meeting the eligibility requirements for doing business in the province, according to the documents.

More than 120 people from the Greater Toronto Area's Chinese community have likely lost nearly $9 million in syndicated mortgage investments solicited by someone they trusted and then loaned to a convicted fraudster, a CBC News investigation has found. 2:32

Syndicated mortgages, which pool investors' money to finance construction of condominiums, retirement communities and the like, aren't suited to most retail investors. The instruments typically fund more speculative projects that can't rely solely on bank lending, making them relatively high-risk even in the best of times, suited to deep-pocketed professional investors. The risks have only grown as Canada's real estate market has shown signs of slowing, potentially amplifying investor losses if more projects fail.

FSCO "could have removed this problem earlier," said Bill Vasiliou, a certified fraud examiner who was responsible for regulating Ontario's mortgage industry prior to FSCO's creation in 1997. "There were complaints registered, and they buried them. They didn't do anything about it."

The regulator's inaction has prompted other government agencies to step in. Ontario's Finance Ministry said in April it planned to transfer responsibility for regulating syndicated mortgages from FSCO to the Ontario Securities Commission (OSC). That change, however, could take as long as two years, according to two sources with knowledge of the process.

There were complaints registered, and they buried them. They didn't do anything about it. - Bill Vasiliou, former mortgage regulator

Documents seen by Reuters also show that Canada's federal police launched an investigation into Fortress's syndicated mortgage business in October 2016. Six people told Reuters they had been interviewed as part of the inquiry, led by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police (RCMP). A police spokeswoman said the agency does not confirm an investigation is under way unless charges have been laid in court.

Fortress spokeswoman Byrne said Fortress and its employees, including co-founders Jawad Rathore and Vince Petrozza, had not received any inquiries from the RCMP, and that "to the best of their knowledge, they are not under investigation."

In the dark

Rathore and Petrozza, longtime figures in Toronto financial circles, founded Fortress Real Developments in 2002. They began offering syndicated mortgage products to individual investors in 2008, a time when savers were hungry for alternatives to historically low interest rates. Both men declined to be interviewed for this article.

For the typical Fortress product, a retail investor puts up a principal loan amount of between C$30,000 and C$100,000 for two to five years. During that time, the investor is paid regular interest — usually around 8 percent — and at the end of the term, the principal should be returned.

Vince Petrozza, left, and Jawad Rathore pose for a photo at the Toronto Stock Exchange in November 2014. Rathore and Petrozza were ordered to pay more than $3 million in a settlement with the Ontario Securities Commission. (Paul Tempany/FFM Capital Inc.) A recurring investor complaint in the FSCO documents Reuters reviewed was that the products weren't what they had been billed to be. Investors said they hadn't been warned of the risks, that they hadn't been told they could lose their principal if a project failed, that they hadn't been told the often-advertised 8 percent returns weren't guaranteed, and that they hadn't been told Fortress and the brokers shared a 35 percent cut.

The complaints mostly targeted brokers who sold the investments. FSCO investigations into the complaints were routinely closed with no action taken.

A 2014 complaint, for example, asserted that a broker selling Fortress products was associated with Fortress — a conflict of interest under Ontario rules, which require that a brokerage firm tell investors of any relationship it has with the originator of products it sells.

The investigation was closed with no action taken. An unidentified FSCO staffer subsequently reviewing the case noted: "No one looked at the disclosure documents or saw the investment itself. The unlicensed activity was noted and documented in evidence uploaded to file but no one dealt with it."

Fortress bills itself as a real estate development company that partners with builders and other developers, providing advice and financing. It insists that it is not involved in the marketing or sale of the syndicated mortgages that help fund its projects.

Left to right: Winnipeg Mayor Brian Bowman, Fortress CEO Jawad Rathore, Fortress COO Vince Petrozza and Winnipeg CAO Doug McNeil meet in the mayor's office in this undated photo. A meeting between Bowman and Fortress officials took place Dec. 15, 2015, according the mayor's online schedule. (Twitter) That's the job of mortgage brokers, who are "solely responsible for any marketing materials" for syndicated mortgages, Byrne said.

Fortress co-founder Rathore contradicted that position in an affidavit to the Registrar of Trade-Marks in July 2013: "Fortress Real Developments' real estate development work includes assisting in the preparation of marketing material and other documentation … which is then used by licensed mortgage agents and brokers in the selling of the syndicated mortgage products."

The one instance when FSCO did take action directly against Fortress was in March 2015. The agency issued a letter of caution to the company after discovering that it was promoting syndicated mortgages despite not being licensed as a mortgage broker, according to emails seen by Reuters and three sources with knowledge of FSCO's investigations. Fortress acknowledged the unlicensed activity and altered its website to bring it into compliance.

Even so, the line between Fortress and the brokerage firms selling Fortress investments remains blurred.

Fortress came to us - Olympia President Craig Skauge

Four of the six Fortress executives named on the company's website are registered as mortgage brokers or agents. Petrozza and two Fortress directors are licensed mortgage brokers with Building & Development Mortgages Canada (BDMC), the self-described "lead broker" for Fortress projects. BDMC and Fortress have the same office address in Richmond Hill, Ontario. Byrne, the Fortress spokeswoman, also represents BDMC.

Three other mortgage brokers - FDS Broker Services Inc, FFM Capital Inc and FMP Mortgage Investments Inc - market Fortress products directly or through other brokers as their primary or sole line of business.

In 2011, Rathore and Petrozza settled accusations with the OSC that they had engaged "in conduct contrary to the public interest" by selling shares to clients of their debt-management business. They agreed to pay C$3 million and were banned from selling securities for 15 years.

Syndicated mortgages aren't securities, which is why they are overseen, along with other non-securitized financial products, by FSCO, rather than the OSC.

The 2011 run-in with the OSC was why FSCO in 2013 investigated Petrozza's application to renew his mortgage broker's license, according to the three sources. His license was ultimately renewed on the condition that he undertake a period of supervision by another broker.

Rathore withdrew license applications in January 2012 and again in April 2015 after FSCO staff raised concerns about the earlier regulatory action, the documents show. He "ultimately decided to continue to focus on real estate development and real estate development consulting," Byrne said.

Barry Stevens's $150,000 never returned

A big draw for investors in syndicated mortgages is that the investments can be put in Registered Retirement Savings Plans (RRSPs), tax-preferred accounts similar to Individual Retirement Accounts in the United States.

That's why Barry Stevens, a 70-year-old retiree in Canada's capital, Ottawa, invested a total of C$150,000 in a Fortress condominium development in Barrie, Ontario, beginning in 2012.

He said a broker told him that syndicated mortgages "gave 8 per cent interest, every one of these is a success, there are never any issues, and you always get your principal back." The clincher, he said, was that the investment could be put in his RRSP.

He received regular interest payments, but when the loan matured in October 2016, he got back none of his principal. Fortress representatives assured him the money would arrive in mid-November, he said. It didn't. Fortress later told him the developer had walked away from the project.

Stevens now works 12 hours a day as a security guard and hits the road at night as an Uber driver.

Under Ontario law, RRSPs must be administered by a trust company licensed in the province. For reasons that aren't clear, Calgary-based Olympia became the provider of so-called Registered Plan Administrative Services (RPAS) for Fortress syndicated mortgage investments like Stevens's.

I thought the money contributed to the building or the costs of the construction - Xiaoyi H an

"Fortress came to us," said Olympia President Craig Skauge. "They said 'Here's what we do. Will you guys handle our clients?' We said, 'Sure.'"

Skauge confirmed that Olympia was twice denied permission to provide services to Ontario investors without a license. He said Olympia was able to continue to accept customers in Ontario as long as brokers there weren't promoting the trust firm. "If mortgage brokers in Ontario were in fact promoting Olympia Trust, then FSCO should have done something about that," he said.

Documents related to FSCO's 2014 investigation into Olympia's role in Fortress investments show the agency in fact knew Olympia's services were being promoted to retail investors.

Referring to an unidentified brokerage, the file reviewed by Reuters states: "Agents at the brokerage assist with all documentation including filling out application forms for Olympia." It further states: "Olympia Trust is the sole RPAS service provider" for Fortress syndicated mortgage investments.

Fortress said investors are responsible for choosing an administrator for the retirement savings accounts. "Fortress does not use or appoint trust firms for syndicated mortgage loans," Byrne said.

A big cut

Brokerage firm BDMC's marketing materials for Fortress investments note that syndicated mortgage loans are "not without risks." In 2016, it added that the loans "lack early liquidity or redemption options" and "carry the additional risks of construction loans and real estate development."

It and other brokerage firms' promotions do not necessarily tell investors that Fortress and brokers take a big chunk of the money raised, or that investors are typically last in line, behind banks and other institutions, to get their money back if a project goes belly-up.

Investors complained to FSCO that Fortress took 35 per cent of the funds raised, according to documents seen by Reuters. Of that, about half typically goes to brokers as commissions and fees. Industry sources said that generally, brokers take between 2 and 4 per cent for arranging a private mortgage.

"I thought the money contributed to the building or the costs of the construction," said 31-year-old chocolatier Xiaoyi Han, who in May 2015 put C$100,000 in a Fortress syndicated mortgage to fund a waterfront condo development in Keswick, Ontario.

Han, who was trying to save enough money to open a shop of her own, said she received interest payments of C$2,000 for three quarters. Then the payments stopped, she said, and her principal was not returned when the mortgage matured. According to the Fortress website, construction crews are now working on the building's foundations.

In conclusion there is no valid or reliable information to support further investigation of the ( Ponzi ) allegations. - FSCO investigator

Han said federal police interviewed her as part of their investigation. She said she complained to FSCO about the investment on June 27. The regulator acknowledged the complaint and said it would investigate. She has not heard back.

FSCO declined to comment on Han's case.

Two complaints sent to FSCO in 2014 focused on the high fees. In both cases, the files were closed within three weeks without any action taken.

Former police

At FSCO headquarters in the North York section of Toronto, a team of about 10 compliance officers review complaints about financial firms operating in Ontario. If they decide a complaint warrants further action, they "open a file" and pass it to FSCO's seven-man investigations unit, headed by Director of Investigations Terry Weller.

Weller was an officer for 18 years with the Toronto Police Service, where he was assigned to several investigative offices, before he moved into financial regulation in 1990. His team is made up of former police with little prior experience in the financial services industry, according to two former and one current FSCO employee.

Weller reports to Monid, the licensing and market conduct chief. He spent 15 years in Canada's armed forces and three years as an insurance company regulator before joining FSCO in 2005. He took up his current role in 2014.

Staff were encouraged not to question Monid's decisions, two former FSCO staffers told Reuters. "We would write many reports that we believe were not acted upon," one of the former employees said.

Bill Vasiliou is a certified fraud expert and former mortgage regulator in Ontario, he says FSCO "could have removed this problem earlier." (CBC)

Vasiliou, the former Ontario regulator, said FSCO lacks the necessary skills and experience in-house to effectively supervise complex financial products like syndicated mortgages. "They should have hired people who could deal with the industry, and who understand the industry and have been thoroughly versed in the legislation," he said.

The marketing is heavy hitting and very glossy. … The hook is that they are registered under a self-directed RRSP - FSCO compliance officer

In an email to Reuters, FSCO rejected that assertion: "FSCO staff have the requisite knowledge, skills, experience, training, and support to regulate the syndicated mortgage market."

Complaints from other government agencies fared no better with FSCO than those from investors.

In July 2013, FSCO opened a file after the Canada Revenue Agency "had advised (FSCO legal counsel Joe) Nemet they suspected Fortress to be Ponzi in nature," an internal FSCO email states.

The file was closed less than a month later. Investigators wrote: "In conclusion there is no valid or reliable information to support further investigation of the (Ponzi) allegations. It is recommended no further action be initiated." Monid concurred, the documents show.

The Canada Revenue Agency declined to comment.

'Greed written all over it'

By 2015, investor complaints and official concern about syndicated mortgages were growing.

In May that year, FSCO Chief Executive Brian Mills called a meeting of senior staff, including Monid and Weller, after Ontario Finance Minister Charles Souza requested information on the products, according to the three people familiar with FSCO investigations. Mills reacted to the presentation by FSCO staffers with shock, saying, "This has got greed written all over it," according to a person who attended the meeting.

Investigations chief Weller, the person said, responded that there was "a lot of smoke, but I'm not sure if there's any fire."

FSCO spokeswoman Jenna LeBlanc said Mills had no memory of what was said at the meeting.

In a briefing note for the meeting, reviewed by Reuters, FSCO staff presented a long list of recommendations to beef up oversight and investigations of the syndicated mortgage business. Among them: that FSCO send a cease-and-desist order to Olympia Trust to stop it from accepting new accounts for syndicated mortgage investments from Ontario residents. That's when Monid decided there was not enough evidence to proceed, internal FSCO emails show.

Around the same time, Steve Dowling, the top securities regulator for Prince Edward Island, contacted a FSCO compliance officer to ask about the products. Residents of his small province who had bought in, he said, were worried that they had lost their money.

In a subsequent memo to Dowling, the compliance officer wrote that syndicated mortgages were being "funded by everyday consumers – mom and pop investors. The marketing is heavy hitting and very glossy. … The hook is that they are registered under a self-directed RRSP."

This market grew faster than FSCO was able to handle - Olympia President Craig Skauge

Jawad Rathore (R), Vince Petrozza present a cheque to Joel Rose (L) of the Toronto Raptors Foundation. (Marketwired) In an October 2015 email seen by Reuters, a FSCO compliance officer noted that "17 files of significance" had been opened relating to Fortress, Rathore and Petrozza since March 2011, and that all had been closed without direct action taken against Fortress.

The same email notes that a "proportion of the syndicated mortgage investment is set aside to pay investors' interest" making the investments "Ponzi like in nature."

In an August 2016 posting on its website, FSCO warned consumers to be wary of syndicated mortgage investments "with advertisements promoting a high return or 'fully secured' investment."

FSCO in October last year suspended the operations of three smaller companies selling syndicated mortgage investments, citing two of them for "systemic disregard" of basic consumer protection issues. Specific reasons cited included failure to provide written disclosure of material risk, failure to disclose conflicts of interest, failure to ensure the suitability of the investments for investors, and providing false and misleading information.

After announcing in April that regulation of syndicated mortgage investments would be shifted from FSCO to the OSC, Ontario's Ministry of Finance in August moved to limit investors' exposure to the products, recommending an annual cap of C$25,000. Regulatory sources said any changes are at least six months away.

And in July, after Reuters began making inquiries about Fortress syndicated mortgages, FSCO sent an email reminder to agents and brokers: "You cannot promote the services of a loan and trust company unless they are registered in Ontario," it said.

In an Aug. 24 email to Reuters, FSCO said the reminder "was a result of a voluntary cessation of syndicated mortgage business by a trust company not licensed in Ontario after consultation with FSCO."

FSCO subsequently confirmed to Reuters that the company was Olympia Trust, which had agreed that from Aug. 4, 2017, it would cease accepting new registered accounts for syndicated mortgage investments from Ontario residents.

Skauge, the Olympia Trust president, said the company agreed to the decision after FSCO raised questions with it about the "industry's practices in Ontario."

"This market grew faster than FSCO was able to handle," he said.