Thursday, September 24, 2020

Fortress Fiasco

A great many investors have lost money on Fortress syndicated mortgages.  The fact that investors sometimes lose money isn’t news.  But I have a more personal story concerning how these syndicated mortgages were sold.

According to Neil Gross, “thousands of Fortress investors were badly stung or wiped out entirely – losing perhaps hundreds of millions of dollars in total,” but the Financial Services Regulatory Authority (FSRA) “announced that everything’s been settled by Fortress agreeing to pay an administrative penalty of $250,000 – an astonishingly low amount in comparison to the estimated $320-million that Fortress pocketed in fees and paid its agents.”

At question is whether Fortress misled investors.  Gross says “FSRA hasn’t provided a rationale for the low penalty, or an explanation about why Fortress was given such a settlement deal without first compensating its investors.”

My small contribution to this story started with a friend (let’s call him Jake) asking for advice.  Jake told me his friend and financial advisor wanted him to invest in some mortgages.  Jake showed me the sales materials promising a 12% annual return on investment.  The advisor was pushing it hard, and Jake knew little about investing.

I explained that the high guaranteed return was suspicious.  Why couldn’t Fortress get financing from more sophisticated lenders?  If these lenders passed, Jake probably should too.  The risk was a possible default on Jake’s entire investment.  Jake remained on the fence until I mentioned commissions.

Jake was surprised when I told him the advisor was likely getting a fat commission for selling these mortgages.  He wasn’t swayed by much else, but said “you had me at ‘commission.’”  Apparently, this is what got Jake to see this advisor as a salesperson rather than a friend.

So, if Jake’s case is at all representative of Fortress’ investors, they weren’t savvy.  They were regular people pushed hard by commissioned salespeople to buy a product.  Like Gross, I’d like to know more about FSRA’s decision to give Fortress a slap on the wrist.

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