Investors in the Paramount Group, which sold pooled mortgage products until it was shut down in 2017, were provided with “stark” and “persuasive” misrepresentations about how their money was being used, a lawyer for the Ontario Securities Commission charged at a hearing on Tuesday.
Mark Bailey, a senior litigator for the OSC, said the more than 500 people who pumped $78-million into two funds offered by Paramount were repeatedly told that their money was being used to fund second mortgages on residential homes. In fact, the money was used to fund highly speculative development projects, and in some cases was either diverted to other investors or used to pay undisclosed fees to Paramount, Mr. Bailey said.
Mr. Bailey described Paramount investors as atypical of the usual, unsophisticated investors who get taken in by a fraud. “They asked the right questions. They read the fine print. They understood the risk. … The problem was what they were told was not true.”
The remarks were the OSC lawyer’s opening salvo in what is expected to be a nine-day hearing into the allegations against the group of companies, which includes Paramount Equity Financial Corp.
None of the three principals of Paramount, which was taken over by a receiver at the request of the OSC in 2017, appeared at the hearing, including its founder and former chief executive, Marc Ruttenberg. Mr. Bailey detailed for the panel of adjudicators the difficulty investigators have had in locating Mr. Ruttenberg to make him aware of the latest allegations and potential penalties.
Someone who answered the door at an address where the OSC understood Mr. Ruttenberg was residing informed the commission that they didn’t know Mr. Ruttenberg, Mr. Bailey said. The only up-to-date contact information that the OSC has for Mr. Ruttenberg is a post-office box at a Toronto UPS store, Mr. Bailey said.
It was only about five years ago that Mr. Ruttenberg was prominent and in demand in the Greater Toronto Area, appearing on promotional YouTube videos and at real estate investor forums touted as “4 Hot Ways to Profit Big in Real Estate.” In a 2018 transcript of an interview with Mr. Ruttenberg, which was conducted by a lawyer for the court-appointed receiver, he described how he came up with the concept for Paramount. It was an effort, he said, to offer clients an opportunity to invest in second mortgages without the time-consuming hassle of investors having to find the right borrower and complete the requisite onslaught of paperwork.
But the OSC has charged that, by selling such products, Paramount and Mr. Ruttenberg were legally required to register with the commission and offer a prospectus to investors – something they never did.
What’s more, Mr. Bailey alleged on Tuesday, Paramount misled investors about how their money was being used, with $50-million of the funds directed to various prospective developments, all of which were owned through companies controlled by a Toronto businessman named Enzo Mizzi.
Mr. Mizzi has not been accused of any wrongdoing by the OSC. He is being sued civilly by the receiver for Paramount, which has alleged that he diverted $18.8-million of the funds for his personal benefit. Mr. Mizzi has not filed a statement of defence and none of the allegations against him have been proven in court. A lawyer for Mr. Mizzi did not respond to an e-mail request from The Globe and Mail.
Mr. Bailey likened Paramount to a piece of candy, wrapped in shiny packaging and labelled “residential mortgages.” When investors opened the first wrapper, they discovered more packaging, he said. And when they opened the second wrapper, “what was there was not even edible,” he said.
Mr. Bailey said that one of the defences raised by Paramount at the outset of the OSC’s probe is that some of the developments were slated to house apartments, or “multiresidential" dwellings which, Paramount argued, made such investments consistent with the funds’ stated objectives. Mr. Bailey said that was incorrect, and that investors were told they were funding houses with real people living inside them – not a proposed building that didn’t exist yet. Some of parcels of land mortgaged by Paramount were unoccupied swaths of land with no dwellings whatsoever, he said. “There’s no one living on raw pieces of land."
The hearing is scheduled to take place two more days this week and six days later in March. A former Paramount senior vice-president, Matthew Laverty, is scheduled to testify on March 26.