Executive Summary: Key Legal and Evidentiary Issues

• Scope of Crown liability in tort for financial regulators under the Crown Liability and Proceedings Act, 2019, including the screening/leave requirement and need to prove bad faith.
• Whether serious regulatory inaction by FSCO regarding syndicated mortgage investments (SMIs) can amount to “bad faith” via serious carelessness or recklessness rather than intentional targeting of investors.
• Use and admissibility of evidence (expert affidavits, hearsay media reports, former regulator testimony) to establish a “reasonable possibility” of success at trial on misfeasance in public office.
• Weighing warnings and red flags (from RBC, CRA, complaint data, and Olympia Trust’s role) against FSCO’s limited enforcement steps to infer possible abuse of public power.
• Existence and contours of public law torts: recognition of misfeasance in public office versus rejection of “misconduct by a public authority” and confirmation that no private law duty of care in negligence is owed to individual SMI investors.
• Procedural outcome of the leave motion: plaintiffs allowed to proceed only with misfeasance in public office, while negligence and “misconduct by a public authority” are effectively screened out with no monetary award or costs ordered at this stage.

Factual background and the Tier 1 syndicated mortgage investments
The case arises from significant investor losses in syndicated mortgage investments (SMIs) associated with Tier 1 Mortgage Corporation, First Commonwealth Mortgage Corporation, and related entities and individuals. SMIs pool funds from multiple investors into a single mortgage on a specific property, and in Ontario the SMI market reached roughly $6 billion and 16,000 investors by 2016. Tier 1–related brokerages used SMIs to finance early-stage real estate development projects. First Commonwealth Mortgage Corporation and Tier 1 Mortgage Corporation were licensed mortgage brokerages; Tier 1 Advisory, owned by Bhaktraj Singh, acted as a marketing and project development consultant but was not licensed. Singh and his associates wore multiple hats: Singh was an officer/director of Tier 1 Mortgage, a mortgage agent at First Commonwealth, owner of Tier 1 Advisory, a shareholder in several Tier 1 projects, and owner of unlicensed trustee corporations that administered the SMI loans and held mortgages in trust for investors. The typical structure involved investors authorizing a designated lawyer to invest in a Tier 1 project, appointing a trustee corporation as mortgage administrator, and, for registered funds, instructing Olympia Trust Company (an Alberta-based trustee) to invest their registered monies into the SMI.

The representative plaintiffs and the Textbook 445 Princess Street project
The representative plaintiffs, spouses Betty Wei and Lawrence Vanderklei, were senior, relatively unsophisticated retail investors looking to deploy retirement savings. In 2016 their financial advisor introduced them to SMI products marketed through Tier 1 or its project developers. After attending presentations, doing some online research, and consulting FSCO’s website, they decided to invest in a specific Tier 1-linked project: Textbook Student Suites (445 Princess Street) in Guelph, a student housing development. They invested approximately $220,000 of their retirement savings through Olympia Trust, expecting an 8% annual return over a three-year mortgage term. The plaintiffs received a FSCO Form 1 – Investor/Lender Disclosure Statement for Brokered Transactions, bearing FSCO’s logo and standard wording that FSCO had not “reviewed or approved” the completed disclosure. The form stated that the project’s “as is” appraised value was about $15.45 million, the purchase price $9.3 million, a first mortgage of $7 million, and the SMI amount of $8.45 million, which implied a 100% loan-to-value ratio. The plaintiffs did not receive the underlying appraisal, were not told that their SMI investment would sit behind $75 million in construction financing, and were not advised they could not enforce their security without the first mortgagee’s consent. Although they technically obtained legal advice, it came from a lawyer retained by Tier 1, not independent counsel acting solely for them.

Regulatory intervention and receivership of Tier 1 projects
By October 2016, the Financial Services Commission of Ontario (FSCO), then responsible for regulating licensees under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA), took decisive action. FSCO alleged that Singh failed to prevent and in fact benefitted from the misappropriation of SMI funds by Tier 1 developers. It issued a cease-and-desist order against Tier 1 Advisory and suspended the licenses of Tier 1 Mortgage, First Commonwealth, and their principal brokers Singh, Balkissoon, and Cassimy. FSCO also sought receivership orders. Grant Thornton Limited was appointed as receiver over several trustee corporations connected to Tier 1, and KSV Kofman Inc. was appointed as receiver for the land underlying 11 Tier 1 projects, including the Textbook development. KSV later reported that the 445 Princess Street SMI raised about $8.4 million, but only $29,000 went into actual development. Nearly $5 million was diverted to non-development purposes: payments to shareholders, large referral and commission fees, significant legal fees, and an undisclosed reserve fund. When KSV sold the property for $7.5 million, all proceeds were applied to pay off the first mortgagee, leaving SMI investors, including the plaintiffs, with no recovery from the security. In 2018, Grant Thornton sued Tier 1, its principals, and affiliated developers, alleging that Tier 1 raised over $130 million and diverted nearly $40 million to insiders, professionals, and sales channels, functioning in substance like a Ponzi scheme in which later-investor funds were needed to service earlier-investor interest payments.

FSCO’s mandate, structure, and complaint-driven regulatory model
FSCO, prior to its replacement by the Financial Services Regulatory Authority of Ontario (FSRA), had a statutory mandate under the MBLAA to regulate mortgage brokers, brokerages, administrators, and agents, to enforce standards around public and client relations, fee disclosure, conflicts of interest, and material risk disclosure, with an overarching purpose of protecting the public interest and maintaining confidence in the regulated sectors. Its regulatory framework was largely complaint-driven: consumers first had to complain to the brokerage; unresolved complaints could then be escalated to FSCO; and licensees were required to report complaint statistics through Annual Information Returns. Internally, complaints were handled by the Market Regulation Branch. Compliance Officers triaged complaints and escalated serious non-compliance to Regulatory Discipline Officers (RDOs), who could order more in-depth reviews, including on-site examinations by Senior Compliance Officers. High-risk findings could be referred to investigators to support enforcement and prosecutions. Brian Mills, FSCO’s Superintendent and CEO, and Anatol Monid, FSCO’s Director and later Executive Director of Licensing and Market Conduct, were the senior officials responsible for this oversight structure.

Warnings, red flags, and alleged regulatory inaction
The central factual controversy concerns whether FSCO responded adequately and in good faith to mounting red flags about the SMI sector and Tier 1 in particular. The evidence showed that by 2014 the SMI market had nearly doubled (from $2 billion to $3.7 billion) within two years and SMI-related complaints to FSCO had grown from a single complaint in 2012 to 22 in 2014 and 32 in 2015, representing an increasing share of all mortgage-brokering complaints. At the same time, FSCO publicly emphasized a risk-based, proactive, evidence-driven regulatory framework, listing product suitability, fraud, and non-compliant advertising as high-priority areas, and acknowledging mortgage fraud as “big business.” Several specific episodes emerged: RBC’s fraud department met with securities and mortgage regulators around 2014 and conveyed concerns that certain SMI players, including Tier 1 Advisory, sat “at the top of the scam” in what RBC considered to be a Ponzi scheme-style operation. FSCO staff recommended investigation and market-wide communications, and RBC offered to share more detailed information. Yet there was no evidence FSCO meaningfully followed up. CRA also contacted FSCO in 2013 in relation to Ponzi-scheme risks in syndicated mortgages, but FSCO did not appear to respond with substantial regulatory action beyond high-level cautionary materials. FSCO examined First Commonwealth in 2014, found contraventions in every file reviewed, and sanctioned the brokerage (a penalty later upheld by the Financial Services Tribunal), but it did not broaden the investigation despite discovering that First Commonwealth’s “back office” agreement with Tier 1 Advisory violated regulatory requirements. A more extensive examination of Tier 1 was scheduled for August 2014 but inexplicably cancelled, with no explanation in the record.

Olympia Trust and cross-jurisdictional regulatory questions
Another strand of evidence involved Olympia Trust Company, an Alberta-based trust corporation that served as custodian of registered investor funds in multiple Tier 1 and Fortress-related projects. FSCO considered whether Olympia Trust was doing business in Ontario without proper authorization under the Loan and Trust Corporations Act. Internal FSCO documents recognized that stopping Olympia Trust’s operations would significantly disrupt SMI inflows, potentially curbing the market. Yet FSCO hesitated, in part due to uncertainty about whether an Alberta company accepting business from Ontario investors via the internet was legally “carrying on business” in Ontario. Instead of promptly using its compulsory powers, FSCO relied on voluntary disclosure and piecemeal investigation through other SMI brokers. Only in June 2017 did FSCO issue a cease-and-desist order against Olympia Trust, after confirming its trustee and administrator role in SMI structures. Olympia Trust then agreed to stop accepting new registered accounts from Ontarians for SMI investments. The plaintiffs argued that FSCO could have acquired the necessary information about Olympia Trust’s activities much earlier by using its investigative powers on SMI promoters, thereby cutting off critical infrastructure to the market before their investment.

The Petrozza licensing decision and systemic concerns
The plaintiffs also relied on how FSCO handled licensing of Fortress Real Developments’ co-founder Vince Petrozza. In 2011, Petrozza and his partner Rathore admitted serious Securities Act breaches before the Ontario Securities Commission (OSC), received a 15-year trading and acquisition ban, and agreed to significant monetary sanctions. These outcomes were publicly reported in an OSC press release. Yet in 2013, FSCO renewed Petrozza’s mortgage broker license, notwithstanding its own Regulatory Framework’s commitment to assessing licensees’ integrity using criminal checks and histories of disciplinary actions by other regulators. FSCO did not produce internal decision materials concerning the renewal. Monid maintained that FSCO lacked “clear, convincing, and cogent” evidence that Petrozza would not act with integrity in the mortgage context, but the court considered it either inexplicable that FSCO had missed such publicly available sanctions or incomprehensible that, knowing of them, it nonetheless found him suitable. Although Petrozza and Fortress were not directly involved in the plaintiffs’ Tier 1 investment, the court treated this as evidence of serious carelessness in the SMI regulatory space generally, reinforcing concerns that FSCO was not rigorously using its gatekeeping and enforcement powers despite evident systemic risk.

Procedural posture and the Crown Liability and Proceedings Act framework
Legally, the case is at the “leave” stage under the Crown Liability and Proceedings Act, 2019 (CLPA). That statute requires plaintiffs to obtain court permission before proceeding with claims against the Crown or its employees that allege misfeasance in public office or other bad-faith-based torts. The plaintiffs pleaded misfeasance in public office, “misconduct by a public authority,” and negligence, and an earlier ruling confirmed that all three theories needed to go through the CLPA leave filter because, given statutory immunity for good-faith regulatory decisions, any viable negligence theory must also rest on bad faith. To obtain leave, the plaintiffs had to show the proceeding is brought in good faith (not disputed) and that there is a “reasonable possibility” the claim will be resolved in their favour. That threshold requires a plausible legal analysis and some credible evidence, but does not demand proof on a balance of probabilities or a full “mini-trial.” The motion judge had to consider both parties’ evidence, assess credibility and reliability, and recognize that plaintiffs at the leave stage have not yet had full discovery from the Crown. The court also dealt with extensive evidentiary objections, excluding parts of the plaintiffs’ record as inadmissible hearsay or unreliable information, such as passages grounded solely in a Reuters article that itself relied on unidentified sources and on the same witness who had sworn the affidavit. Portions of expert affidavits lacking stated sources, or resting only on the statement of claim, were given no weight.

Bad faith: serious carelessness as potential abuse of public power
Substantively, the judge first analyzed whether the evidence could support a finding of “bad faith,” which is a necessary element of misfeasance in public office and, under the CLPA structure, a precondition for getting past statutory immunity. Bad faith includes intentional misuse of public power (such as discriminatory revocation of licenses), but Canadian law also recognizes that sufficiently “inexplicable and incomprehensible” serious carelessness or recklessness by a regulator, especially in the face of known risks, can amount to an abuse of power from which bad faith may be inferred. Drawing on authorities such as Roncarelli v Duplessis, Finney v Barreau du Québec, and Entreprises Sibeca, the court held that the plaintiffs had marshalled enough credible, non-hearsay evidence to show at least a realistic chance that a trial judge could infer bad faith from FSCO’s conduct. The key instances included ignoring or minimally acting on RBC’s Ponzi-scheme warning about Tier 1, failing to fully utilize statutory investigatory powers despite rapidly rising complaint levels and prior findings of contraventions, delaying decisive action against Olympia Trust despite recognizing its central role, and the unexplained renewal of Petrozza’s license despite his OSC sanctions. At the same time, the court rejected several strands of the plaintiffs’ bad-faith narrative as unsupported or inadmissible—such as reliance on social media commentary, unproved allegations relating to a separate Collier Centre/Fortress project, and unspecified warnings allegedly emanating from other regulators—stressing that not every criticism of FSCO’s performance had evidentiary traction.

Misfeasance in public office and the viability of the plaintiffs’ claim
Turning to the elements of misfeasance in public office, the court noted that the tort requires public officials to have knowingly engaged in unlawful acts in their public capacity, aware that their conduct was unlawful and likely to harm the plaintiffs, or at least recklessly indifferent to that risk. The defendants argued that misfeasance cases typically involve officials who have a direct relationship with the plaintiffs, pointing to decisions where claims failed because the government actors were too remote. The court rejected an overly narrow reading, emphasizing that the plaintiffs alleged systemic abuse of regulatory powers inferable from serious, unexplained inaction, not individualized targeting. At the leave stage, the question was not whether misfeasance would ultimately be proven, but whether the record made that tort theory realistically arguable. In light of the accepted bad-faith evidence, the judge concluded that the plaintiffs had a reasonable prospect of establishing misfeasance in public office against the Crown and its senior FSCO officers. Leave was therefore granted for this cause of action, allowing the class action to move forward on that limited tort basis.

Rejection of “misconduct by a public authority” and screening out the negligence claim
The plaintiffs had also pleaded a tort labeled “misconduct by a public authority,” derived from academic commentary and dicta in Paradis Honey suggesting courts might fashion a general damages remedy for unacceptable public-law conduct. The motion judge held that this concept has been effectively rejected by later Supreme Court jurisprudence, particularly Nelson v Marchi, which insists that negligence and other private-law torts remain the proper framework for damages against public bodies, not free-floating public-law wrongs. As such, “misconduct by a public authority” is not a recognized cause of action in Ontario, and the court refused leave for that aspect of the claim. As for negligence, the court applied the Cooper v Hobart and Imperial Tobacco line of authority on governmental duties of care. It held that FSCO’s statutory scheme, like the registrar’s regime in Cooper, creates duties owed to the public at large rather than to individual investors, and that there was no sufficiently close and direct relationship (“proximity”) between FSCO and the plaintiffs to ground a private duty of care. The plaintiffs had not pleaded or proven specific advisory interactions with FSCO akin to those found sufficient in older cases; their relationship with the regulator was indirect and general. Given those structural and policy constraints, the judge found no prima facie duty of care and, in any event, that overriding policy reasons would negate such a duty, meaning the negligence claim had no reasonable prospect of success. Leave was therefore refused for negligence as well.

Outcome, successful party, and monetary consequences
In conclusion, the court held that there were “numerous red flags” about Ponzi-scheme-like activity in the SMI market and that vulnerable, unsophisticated investors were seriously harmed by the ultimate collapse of Tier 1-linked projects. FSCO did eventually act in 2016, but the plaintiffs’ central question—whether it should have intervened earlier to protect them—remains for trial. Because FSCO officers are Crown employees and statutory immunity bars suits based on mere negligence in good-faith regulatory decisions, the plaintiffs had to clear the CLPA leave threshold by showing an arguable case of bad-faith-based tort. On that limited issue, the plaintiffs were partially successful: they obtained leave to proceed only on the tort of misfeasance in public office, while their claims for negligence and for “misconduct by a public authority” were effectively dismissed at the screening stage. No damages or compensation were awarded in this decision, and the statute directs that each side bear its own costs of the leave motion. As a result, although the plaintiffs can now continue forward as the successful party on the misfeasance claim, there is presently no monetary award or quantified costs in their favour, and any eventual damages or class recovery—if liability is established at trial—cannot yet be determined from this decision.