Mortgage Broker

CMB MAGAZINE cmba-achc.ca spring 2016 | 45 istock legalease The background – A mortgage broker who breaches his or her duties can trigger long-lasting regulatory, civil and criminal consequences. Consider the recent experiences of Ontario mortgage broker McGill and the company of which he was the directing mind. e broker had used his reputation to find investors for a Ponzi scheme. Money had been transferred between the broker, his wife and the mastermind of the scheme. e mastermind took the primary benefit of the scheme. e extent of the broker's gain was unclear; at a minimum he earned fees on mortgages that several victims took out in order to fund their investments. Of the approximately $3.5 million gathered from "investors", only about $200,000 was in fact invested. e balance went to support the fraud by making phoney interest payments and to pay for the mastermind's residence, Porsche car and credit card debts. When the scheme collapsed, payments to the "investors" stopped. Surprisingly, more money was collected for the scheme aer the collapse. e mastermind sent a letter to the "investors" explaining that payments were being postponed because funds had been frozen overseas. Two years later, the broker sent the "investors" a letter advising them to sue the mastermind and a fictitious investment manager. e broker claimed to be a dupe – a victim of the mastermind. He said he had believed the "investments" to be valid and the money to have been frozen in an overseas bank. e fraud went on for about five years (September 2004 to October 2009), with the "investors" ultimately losing their funds. Regulatory consequences – In March 2010 the Ontario Superintendent of Financial Services made an interim order to suspend the individual's and the company's respective licences. e regulator said that there were reasonable grounds for belief that the broker will not deal or trade in mortgages in accordance with the law and with integrity and honesty. His role in the scheme had resulted in serious loss to many individuals. e regulator also proposed making the revocations permanent as the brokers were believed to be unsuitable for continued licensing. As no hearing was requested by the brokers to determine the issue, the revocations became permanent. Civil court (step one) – In April 2014 the Ontario Court of Appeal allowed the mortgage brokers' professional liability insurer to waive coverage. e broker had made a material misrepresentation by claiming, at the time of applying for insurance, to be unaware of any potential claims. e statement was not true. Criminal consequences – e mortgage broker was convicted of 25 of the 28 fraud over $5,000 charges. e Ontario Court of Appeal in February 2016 sentenced him to four years in the penitentiary. e Court said, "Given the size of the fraud, the lengthy time period over which it took place, the motivation of greed, the breach of trust, the number of victims and the devastating impact on those victims, a penitentiary sentence was required." It rejected the broker's argument that he was a victim of the mastermind. Civil court (step two) – e "investors" are likely to now obtain judgement against the broker. e criminal court has already accepted the accusations against the broker as having been proven beyond a reasonable doubt. In civil court, the accusations need to be proven on only the "balance of probabilities", a much lower standard. e practical problem for the investors is they may not be able to enforce their judgments if the broker has no assets for them to go aer and no insurance in place. Nevertheless, the broker may be financially crippled for life; debts obtained by fraudulent means or fraudulent misrepresentations survive any bankruptcy. The takeaway – A mortgage broker who is found to have committed fraud can be severely sanctioned professionally and financially. As well, the broker's liberty can be taken away. e sanctions can effectively ruin the broker for life. The High Price of Fraud How one broker conned his clients and lost everything BY Ray Basi, LL.B. staff, Education and PoLicy REviEw

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