SkyCity developers intentionally misled investors about value of Winnipeg land, Crown argues at fraud trial

Lawyers wrapped up closing arguments Wednesday in a criminal fraud case against the developers of the never-built SkyCity condo project, whose developers are accused of misleading investors.

Fortress Real Developments principals Jawad Rathore and Vince Petrozza, who are on trial in the Ontario Court of Justice in Toronto, headed up SkyCity, a failed $200-million 45-storey condo project that was supposed to rise from a parking lot at the corner of Graham Avenue and Smith Street in Winnipeg.

The two were charged with fraud in 2022 in connection with a type of investment called syndicated mortgages — loans made by several investors to cover initial development costs like marketing and zoning, with the land itself acting as collateral.

Crown prosecutors argued Rathore and Petrozza committed fraud by misleading investors about the value of land underlying syndicated mortgages on the SkyCity project in Winnipeg and the Collier Centre in Barrie, Ont., while the defence countered that investors were made aware of the risks of the investments and that it was the brokers' not the developers' responsibility to inform investors.

Since syndicated mortgage investments are secured against land, the value of that asset is key, because if there's a problem with the project, the investment can be recovered by selling the property, Crown prosecutor Vallery Bayly said.

Information given to investors was purported to show the current market value of the land, "but these were lies," she said.

"It's not honest to conduct one's business by lying to mom-and-pop investors in plain language while expecting them to untangle the precise meaning of technical documents or follow a trail of breadcrumbs to discover the truth," Bayly said.

Fortress made the value of the land securing syndicated mortgages a central theme in marketing, Bayly said.

"A reasonable person would consider it dishonest to fail to disclose to investors that appraisals were done and showed drastically lower values than the opinions of value, because that information bore directly on one of the central security features that were advertised to investors."

Rathore and Petrozza knew what investors were being told and met personally with investors to promote the investments, Bayly said.

Bayly quoted a witness who testified about a presentation where Petrozza and Rathore spoke about how safe and secure the syndicated mortgages were, because investors are registered on the land title.

A SkyCity video that was entered into evidence showed Petrozza training brokers on what needed to be disclosed to investors in the syndicated mortgages.

Bayly said there were internal email discussions that demonstrate beyond a reasonable doubt that Petrozza and Rathore knew there were property appraisals that had lower values than the opinion of value given to investors.

"They should be found guilty of fraud on this basis," Bayly said.

Fortress defence lawyer Scott Fenton opened by saying two of the four projects that were initially part of this fraud case were dropped. He said of the 80 projects Fortress undertook using the same financing and disclosure models, "most were successful, if not fantastically so."

Fortress was involved in raising $920 million by way of syndicated mortgage loans, which helped 25 developers build 5,200 residential and 1,700 commercial units, Fenton said.

He quoted a Fortress report that said 19 of 20 projects provided syndicated mortgage investors a rate of return that was above eight per cent, and seven of those projects had a rate of return between 10.4 and 14.32 per cent.

"Not possibly fraud — rather, a successful business endeavour lawfully conducted," Fenton said.

Rathore and Petrozza were pro-disclosure to investors, the disclosure was robust, and independent legal advice was provided, Fenton said. 

Defence attorney Gerald Chan said an important part of this case is that Petrozza and Rathore did not deal with the investors directly in terms of selling these loans. Rather, they relied on licensed mortgage brokers who have the legal duty to ensure their clients understand the loans and the risks involved.

Chan said the opinions of value that were given to investors were independent and based on acceptable, legitimate, legally permissible methodology.

"Fortress was not required to disclose other valuations and appraisals in its possession on which it was not relying to obtain financing and, in fact, it was contractually prohibited from doing so," said Chan.

The syndicated mortgages "were not and were never advertised as risk-free investments," Chan said.

Justice Daniel Moore's decision is expected May 28.