Inside Ontario’s $10 Million Real Estate Scandal
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Harmful content
Misogyny
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Summary
In the wake of the IPro Realty scandal, Mark Morris, a real estate lawyer in Ontario joins us for a second time to talk about the scandal. In this episode, Mark talks about what the scandal was and what it meant to consumers at the time of the scandal, and why it should have been the end of it.
Transcript
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They called it one of the biggest real estate scandals Ontario has ever seen.
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iPro Realty, a giant brokerage with over 2,400 agents and 17 offices,
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suddenly collapsed when regulators discovered up to $10 million missing from its trust account.
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and the industry was left reeling as police opened up a criminal investigation.
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But now it looks like the same guys are back in business.
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Mark Morris is a real estate lawyer here in Ontario.
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He owns LegalClosing.ca, and he joins us for a second time today,
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the first time with Paul Micucci earlier on the same topic on the iPro scandal,
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Oh, it's a pleasure. Thank you again for having me back.
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Well, as I kind of outlined in the intro, you know, iPro was probably Ontario's largest brokerage scam in history.
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Maybe I'm wrong about that, but certainly it drew the attention of the authorities.
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And so sort of as a follow-up, first of all, why don't you take us through what the scandal was
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and what it meant to consumers at the time that it occurred?
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Yeah, well, I think you're right, by the way, in the way you classified that, because you called it a scam.
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But I do think it's the biggest scam, meaning that it was born of intention and, as a result, has criminal elements,
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regulatory elements, and has really shaken the industry to its core.
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So just to remind your audience as to what has transpired here, there was a large brokerage of about 2,500 agents,
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which is about as big as they come in Ontario, all of whom belong to this group called iPro Realty.
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And it turned out that iPro Realty was effectively not guarding its trust fund appropriately.
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So to back up and to give context, all lawyers in Ontario and all brokerages in Ontario are entrusted with something called a trust account,
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And as you can imagine, being an account for other people's monies, it has to be given and treated with the heightened diligence
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that comes along with dealing with other people's monies.
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These are monies you're holding for other people.
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So in the context of real estate, there's two different types of monies that a brokerage regularly holds.
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The first is the monies that it is holding by way of a deposit for transactions that have not yet occurred.
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And as you can imagine, with 2,400 agents, there's a whole lot of people, because you sign an agreement to purchase a sale,
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and then it usually takes about three months to close.
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There's a whole bunch of people who have a whole bunch of deposit monies sitting in that trust account.
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The second monies that are usually held in trust are those monies to pay out the agent commissions.
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Because as you can imagine, agents themselves have to wait until the day of closing for those monies to be earned.
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And then once they're earned, there's a period of time where ultimately they have to be paid as well.
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And what happened here is that there were trust irregularities that took place such that there was not sufficient money
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within the trust account to account for all of the people's money who ultimately entrusted IPRO
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If you know the way trust accounts work, particularly for large organizations,
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I've run large law firms in the past, and my law firm is now a mid-sized law firm again.
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And the reason we do daily reconciliations is actually not so that I can come on a show
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like this and brag, but rather because if you have a single issue and you discover it
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And in fact, we have to pay a lot of money for people whose sole job it is to monitor
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the trust account and make sure that every dollar that's flowing is being treated seriously.
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And that would be the expectation of an IPRO or a right at home or one of these larger
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brokerages that they were doing more than the mandatory minimum requirement of reconciling
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once every month, but they were on it every single day.
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So the fact that money was missing was itself a regulatory failure in that firm.
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But that is not the essence of why it is we are still speaking about IPRO because people
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And if you take a hundred people in a room, you're going to have people who are 100% honorable
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and you're going to have a given percentage of people who are not.
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And the regulatory body's purpose, in this case, the regulatory body in real estate is
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called RICO, the Real Estate Council of Ontario, is to ensure that all actors, whether
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good, evil, malevolent, negligent, or otherwise, are properly accounting for their trust obligations.
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In this instance, RICO, through an audit, discovered that there were discrepancies in the trust account.
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And the problem that took place here is that RICO did not act with dispatch.
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In fact, many people believe that RICO acted with anything but.
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But RICO took three months in order to properly identify the issue and shut down the brokerage.
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Those three months, people had no idea that this was taking place, even though the regulator
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did, continued to put new monies into the trust account, continued to operate with the
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Even though everyone realized that was not the case, at RICO, that is to say.
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And when they shut down the brokerage, they did so in the most inappropriate of ways.
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Specifically, they gave what was, by any stretch, a slap on the wrist to people who embezzled trust funds.
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This was been taking place for a long period of time.
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And it's worse than a Ponzi because it's an involuntary Ponzi.
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It's a Ponzi where you cannot tell you're part of a Ponzi scheme as opposed to someone
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And then you're duped and you didn't realize it was a Ponzi scheme.
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It's actually the easiest Ponzi scheme to execute because you don't have to explain anything
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And so what happened here is that RICO was negligent because it took three months for
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When it took action, its action was wholly deficient.
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The regulator at the time, who has since been removed from his duties as a result of this,
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basically said, you will be allowed to voluntarily withdraw yourselves, the two owners of IPRO,
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You'll be allowed to claim semi-retirement, which is what they did.
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And then struck a deal where they were allowed to transfer the brokerage's underlying assets
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to an entity that was, for all intents and purposes, clean and thus obfuscate the fraud
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Originally, they reported there was like, I think, under $8 million that was in discrepancy
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And then shortly thereafter, we're finding out that it's closer to $24 or $25 million.
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So now, has the money been restored to any trust fund or are these consumers out their
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So let's be very clear, firstly, as to the numbers.
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The $24 million is a sensational number, not because it's not accurate, but because $24 million
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is in play, but that's not the number that is missing.
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For the purposes, and so when we hear $24, $30 million, that was the total amount of money
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that was fungibly used within this system, but some of it was paid back.
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So it's not that there's $24 million in losses.
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We don't know what the total amount of losses are.
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We'll find that out when the audit comes out, and we'll talk about that was mandated by the
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frauds, but what is important about the number question happens to be the number eight, because
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$8 million is the mandatory insurance that RICO demands that brokerages maintain for the
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What that means in English is that $4 million covers commissions and $4 million covers the
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So whether it be $10 million, $24 million, or $100 million, anything above $4 million that
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deals with consumer deposits is a loss that is not covered by insurance.
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I mean, at that point, the trust account will be made whole.
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If it's just $4 million that are missing, no problem.
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But if there's $10 million in losses on the consumer level, not the commissions, then you're
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looking at a $6 million discrepancy that needs to be made up from somewhere.
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Now, as it turns out, the realtors of Ontario, to their credit, are sickened by what happened.
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They're sickened by what happened due to self-interest.
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I'm not trying to say that they're altruistic beings that ultimately love this.
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I'm saying to you, they realize that their own credibility is on the line here.
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Because if a single consumer loses a single dollar putting money into a brokerage in Ontario,
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whether or not the insurance covers it or not, then we all collectively as a profession have
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I mean, you don't want to create suspect in any industry, especially one with high-priced,
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And that's the reason that RICO took an approach, which I think is actually quite smart.
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First smart thing they did in this entire thing, where they said, for commissions, everyone
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People will probably come out 40% on the dollar, whatever.
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For Ontarians that have their deposits, these things continue in the normal course.
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There may be a special levy that takes place on realtors at the end of this.
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They have a $50 million, I think, retained earnings in their statement.
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But one way or the other, RICO, on behalf of the industry, is seemingly not allowing consumers
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to lose a penny beyond the insurance mandates, specifically because if they start doing that,
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And if they fall aside, then, as you can imagine, it's much more than the deposit.
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Yeah, if people's money vaporizes, the home deals go away.
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Okay, so now it begs the question, what were they doing with the money?
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It's actually, you know, that's probably the most interesting...
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I've been interviewed on this a couple times, and that's probably the most interesting question
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Because, truthfully, I mean, they had a nice house or two, and I think there was some evidence
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that they may have had a yacht of some sort and everything else, but they weren't living
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extravagantly the way that you would if you were just embezzling.
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I'm not saying to you this is the case, but there's reason to suspect that their basic
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Right at home pioneered a new model for the industry.
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And the new model, it used to be the case that everyone used to divide out their commissions
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So if you were a REMAX agent, you would give 40% to the brokerage and you'd keep 60.
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Then over time, particularly as technology kind of came in, those splits changed to, I don't
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And then this new model came into the industry that had never been there before.
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Right at home pioneered it, where they said, we're going to take $295 a deal, regardless
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And what we're going to do is we're going to be such nimble and good operators.
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And we'll do in volume, we'll give us net profit.
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You have to be a really, really, really good operator.
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And by the way, the operators right at home were really, really good.
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Howard, Drew Karsh, and others, magicians at what they did.
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And they operated properly at these rates, which people said they could not operate at.
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They couldn't understand how they were doing this business.
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I started up a law firm called Access Law, which was based in Walmarts.
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By the time I sold it, we opened up 13 law firms in Walmarts.
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And people were like, how do you make profit on this?
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I just had a family member finish their will at that very Walmart location.
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I co-founded that with my partner who's still running it, Lena Koch.
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But eventually a profit was made once we actually figured out the imaginations of quality and
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And that's much, much harder than you can imagine.
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But I don't think people quite understand how hard it is to streamline operations.
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And if you have ever been in business, you will know doing something in volume and making...
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And particularly in commoditized services where marginal costs don't fall at scale.
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But basically what it means is if you are manufacturing a physical device, if I'm manufacturing
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this, if I produce 10,000 of them, the cost is $100.
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But if I produce a million of them, the cost is $5.
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Because marginal costs, the cost of every item falls at scale.
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But with professional services, marginal costs don't fall at scale.
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You still make the same profit, but there's no marginal cost differentiation because you
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have to tack on additional people and quality assurance.
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That process of somebody actually physically doing that work.
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So 2,400 agents could make for a very profitable business if you have a Howard Drukarsh who's
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And Sears did not have their operations down where Walmart did.
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And actually, if you are iPro, you can see based on how many people had to lend money,
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to the operating company over time, that they weren't running efficiently.
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So if you're asking where the money went, yes, to some degree, I'm sure while they were sitting
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there and delving into the trust, they were paying themselves handsomely.
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And I'm sure it will be discovered that they had yachts and everything else.
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But in terms of siphoning $30 million, that's not, it seems, what was going on.
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It didn't seem to be living that they weren't living with stolen money.
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They were operating their business because they could not operate it without it, which
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You know, business people, you know, if you're if you don't have something that's working,
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Shut it down or alternatively, borrow your money and put your do what we all do.
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You can't embezzle money, take it from someone else.
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But to your question, what happened to the money?
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I think we're going to find it's a mixture of both.
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I think they were living on it, though, not living too large, although they were living
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large, combined with the fact that they were using it for the operations of the business.
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I think that my question is, if they do these inspections every four years, is that enough?
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Now, Rico is saying that they're going to, I guess, insulate and be better enforcers,
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better inspectors, and that they're going to play a heavier role based on this specific
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So you remember how I was just talking about operations of a business?
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Operations of a business require detailed analysis of things that actually make things
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One thing that would make Rico better is not their attestation that they're going to be
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Rather, an acknowledgment that brokerage A is not brokerage B.
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An acknowledgment that LegalClosing.ca, which is my firm and does 10 deals a day.
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That's humble bragging here for the purposes of this pod.
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It's perhaps deserving of additional audit track that a person who does two deals a month
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is not because LegalClosing.ca presents a systemic risk, whereas that person does not.
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And well, certainly not inspected over that period of time.
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But if you think about it, there's a very easy way to do it for the purposes of Rico.
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If you have 2,400 agents, there should be no excuse.
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Brokerages that hit 1,000 and more agents should be audited on an annualized basis,
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whereas brokerages that have five agents perhaps can go through a four-year audit track.
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And yet Rico hasn't even discussed turning its attention to a bifurcated audit track,
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which would accord with the realities of the market today.
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But I don't want to pretend that I'm high and mighty.
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My colleague, Cartel and Bouie, just had an article written about them in the Toronto Life
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where they basically embezzled $90 million and have been living their best life on client trust funds.
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Similarly, there's someone out in Brampton, a real estate lawyer,
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who's gone ahead and purchased out $3 million from their trust accounts.
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And my suggestion to the Law Society on that is do not allow people to ultimately conduct
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real estate transactions if they don't have sufficient coverage per transaction.
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That is to say, if you're doing a $10 million transaction and Law Pro's mandated minimum
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is $1 million, make sure that you have excess for $10 million before you can take it on.
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There are ways of being smart about this that do not require us to say,
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Rico, do a better job and start heavy hand of regulation.
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Rico has to date shown no evidence that they are thinking about these things.
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But then again, Rico has gone properly, silent.
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We haven't talked about any of these aspects, but this is a fallout of the scandal.
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And the high likelihood is that regulatory reform, internalized regulatory reform is in
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the cards and that these matters will start being discussed as a viable mechanism as opposed
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to just saying, we're going to audit everyone more.
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So, Mark, these guys, I'm sorry, I had their names in front of me.
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And it, but the group, so sorry, it was Rui something or another and someone, I forget
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And before the end of the show, I will find it.
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But essentially they were told, okay, guys, we'll give you early retirement and we'll do
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And I guess they'll figure out what's going on there.
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Meantime, they're able to open up iCloud, which seems to be doing the exact same thing.
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It is called iCloud, which is hysterical because they'll be sued to oblivion by Apple at some
00:21:51.720
point, which, which, which it shows you the haste in which they opened it up that they
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I feel badly even saying the name out loud because I just feel like anybody from Apple
00:22:01.540
right now in the legal department is going, okay, there were two, there were two different
00:22:07.020
I think it was skybound and iCloud that were opened up and the fact that they were opened
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up and the fact that people who were involved in iPro are involved in iCloud and skybound
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And there's a whole lot of people who work for iPro who probably knew nothing of the scandal
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and we can't paint them all with the same brush.
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If someone who was affiliated with iPro is forever tainted as a result of a scandal that
00:22:36.960
they had no part of or no knowledge of, that is itself a manifest injustice.
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And there are a bunch of people who have opened up iCloud and who have opened up skybound.
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And we don't know if they have been involved or not, although we suspect they were because
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The scandal is not that the people who are not affected by the scandal are trying to reconstitute
00:23:06.160
and do what they need to do and make a living and everything else.
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Begrudgingly, you've got to give people their due.
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The scandal, the essence of the scandal here, above all of us, and we haven't touched on
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this, is that RICO, in its brilliance, facilitated the underlying transfer of the value asset
00:23:32.700
Every business, doesn't matter what business you're in, is valued on the basis of its future
00:23:40.300
So if your future cash flow is expected to end in three years, then you will only get
00:23:45.020
paid for the present value of three years worth of new cash flow.
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If you have 2,400 agents and your future is looking bright, then it's called a perpetuity.
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You're assuming that it's going to continue forever and 2,400s are going to generate the
00:24:00.360
following, and therefore, the present value of that is X, and that's how you value the
00:24:04.980
And it's usually at an X factor of 10 or whatever it is over a period of time.
00:24:09.840
It's usually an X factor of about one, to be very frank, for professional service firms.
00:24:16.880
In the normal thing, tech is about eight outside of the unicorns.
00:24:27.960
But professional services are about one, because there's no longevity of purpose.
00:24:34.300
If Mark Morris goes away, legal closing is not valued the same way, because they are saying
00:24:47.400
What happened here is that the underlying value is the agents.
00:24:51.820
And what RICO did is, before they even explained that there was a fraud, they basically said,
00:24:56.960
hey, every one of you that are agents of iPro, we are automatically transferring you to iCloud,
00:25:04.660
unless you opt out of the system in three days.
00:25:08.000
Now, opting out of the system is not an easy thing for an active agent to do.
00:25:14.300
They have to be comfortable with their new contracts.
00:25:16.640
It takes a month or two months to ultimately do this.
00:25:19.900
And so what RICO did in giving people three days, many of whom are on vacation, many of
00:25:24.880
whom aren't following this, whatever, they facilitated the underlying value transfer from
00:25:32.220
a infected firm called iPro to a clean firm called iCloud, clean until Apple sues them.
00:25:39.840
And that underlying value transfer means that iCloud is now sitting on the results of what
00:25:55.700
RICO was the one who said, we're auto-transferring.
00:25:58.100
They didn't say, hey, guys, you guys only have three days and you have to find a new brokerage.
00:26:04.120
And there's reason to suspect that the principles of iCloud are related or maybe even guided by
00:26:17.020
We can allow people to do and start their business.
00:26:20.120
But what you're saying is an industry regulator can't be helping a failed company that has done
00:26:27.600
something untoward with their trust funds and just allow them, because even if they're
00:26:33.980
various brokers or signed on members, took three days or five days when they made the
00:26:41.580
transfer of that company to take on whatever investor was going to get behind them, they
00:26:46.600
showed that investor the value of all of these brokers that were associated with them or all
00:26:51.860
of these agents that were associated with them.
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And that then gave them the basis for the value of their new business.
00:27:02.840
I mean, it just stinks to a point where there was consequence.
00:27:09.440
The minister, who is ultimately responsible, came in and said, to hell with this.
00:27:16.520
And they gave strict instructions about the audit that's to take place.
00:27:20.620
They mandated that that audit be public, which it will be when it is released.
00:27:25.340
It's let things quiet down a bit, which is good for everyone right now.
00:27:30.200
And then this will kind of spark back up again.
00:27:36.460
It's just we're waiting to find out the full extent and report.
00:27:39.760
Quite frankly, the answering that they'll probably end up doing is a slap on the wrist as well,
00:27:44.860
which is to say they may have an overseer themselves, an ombudsman who you can complain to.
00:27:55.840
Truly, what needs to happen is RICO just needs to be better at its job.
00:28:00.080
Because whether it's the ministry or RICO, this is a failure of people.
00:28:05.100
And wherever those people are, whether they're at RICO, whether they're at the ministry at a board level or anything else,
00:28:10.220
anyone could have failed in their regulatory tasks.
00:28:13.580
What we need to do in this country, Canada generally, is we need to take justice matters more seriously.
00:28:21.040
When you rob trust accounts, you need to go to jail.
00:28:25.100
When you go ahead and you do something that is untoward, you should face consequences.
00:28:34.840
I have endless criticism of the way the United States chooses to met out justice.
00:28:39.320
I don't think it is justice in half the instances.
00:28:42.140
But quite frankly, it goes the other way in Canada.
00:28:45.740
You can't let people who are doing this go free because if you do, you're setting an example.
00:28:55.920
I haven't looked in anticipation of this interview.
00:28:58.200
But right now, in my trust account, I'm taking a look.
00:29:01.600
I have $12,300,000 sitting in my trust account today for today's transactions.
00:29:12.320
If they don't take this seriously, what stops me?
00:29:22.600
What stops the nefarious actors who are lawyers?
00:29:26.520
And there are the same two, three percent that infected eye probe can infect anything.
00:29:31.500
What stops them from looking at the $12 million that's in their trust account and going off
00:29:42.960
We see that in widespread, large corruption in this country all the time.
00:29:51.000
People that could, should, or even be tried under a criminal charge for the things that
00:29:59.280
I mean, we saw it happen in this province recently with a training program.
00:30:12.120
This is, this is a problem of, of ossification of our systems.
00:30:16.940
Do you know that only one person went to jail during the great financial crisis in the United
00:30:25.640
It's not like we, it's not like we're not facing, it's not like we're facing a system
00:30:32.440
The King's court exists in almost every democracy, right?
00:30:36.620
But we live in this country and it's on us to do better.
00:30:48.840
But to their credit, the conservatives bring a lot of value to the table, particularly with
00:30:52.140
regards to economic policies and particularly with regards to justice issues.
00:30:57.040
And the truth is that it's all well and good to actually give deference to rights and
00:31:05.560
But once you've exhausted that, you need a hammer.
00:31:11.220
And the conservatives understand that to their credit.
00:31:16.740
And I wish that there was more attention paid to this.
00:31:22.400
I think we're seeing that on a regular basis right now.
00:31:24.840
I think that what has happened in Canada is certain polarity is going to fade away.
00:31:31.460
For example, you just said that you're a liberal.
00:31:43.140
And I think more issues, by the way, my vote could be swayed.
00:31:50.160
But if we have more conversations that aren't polarized by political party or, you know, big
00:31:59.560
party thinking, if we sit down over these issues, things like people committing crimes against a
00:32:05.700
large group of people, people committing crimes against an industry, you know, people that we
00:32:14.440
Unless we start to really watch over that, there's going to be problems.
00:32:26.300
There's so much overlap at a macro level between what the interests of everyone are.
00:32:31.960
I'll give you a great example that I was involved in for the past two years.
00:32:37.480
So what happened was the federal liberals were incredibly lax with their immigration policy,
00:32:49.100
And what the bad actors in Ontario recognized, Conestega College being the worst and there's
00:32:54.940
others, that they basically had these fields of people in India, all of whom wanted permanent
00:33:00.500
residency and all of whom could obtain it through a loophole in the system that allowed them
00:33:18.920
They knew they were abusing the immigration system.
00:33:20.860
They made millions of dollars over the course of years, leading to disastrous effects in our real
00:33:26.840
estate bubbles in Brampton's real estate bubble, particularly, and have led to see change in the way Canadians actually as a whole even see immigration, where it's now no longer a net positive for the first time in Canadian history.
00:33:41.060
I think both liberals and conservatives can easily come together on an issue like this and say, listen, immigration may be a greater good, but like hell, we're putting up guardrails to ever allow something like that, where we're taking advantage from a liberal perspective, where we're taking advantage of poor innocent people and taking $75,000 away from the working people in the home.
00:34:01.320
And conservatives are saying, and like we're just letting anyone into this country fundamentally that have no income or qualification.
0.91
00:34:07.260
Well, we're aligned on the basic macro idea that immigration controls are important, right?
00:34:15.720
But on both sides of that fence now, we all are having the same conversation.
00:34:24.440
We need to make sure that this doesn't happen, not just for the sake of Canadians here now, for the sake of people coming to this country.
00:34:31.520
You know, I saw a recent report saying, and by the way, I don't love all reports, and this one seemed a little fictitious, but the intent was there.
00:34:41.100
There was a time where Canada was the top of the list of great places on earth to live, in the top five.
00:34:48.600
We're now under, I think we're at 35 on that list now.
00:34:52.580
And that is because of decisions that we make like this, that allow industries to steal from people or be disreputable because it's being covered up.
00:35:12.160
But truthfully, and this is a decadence that is ascribed not just to Canada, but also to the Western world as a whole, we are no longer economically productive as countries as compared to top economies.
00:35:24.740
When someone goes to China and sees the fact that they're about to introduce drone vehicles into their car dealerships, and that within five years, they're expecting those drones to be flying within major metropolitan centers, and compares it as against the fact that we can't build a freaking LRT over 19 years, and not even have a similar investigation.
00:35:45.200
We are talking about an ossification of our economies, which naturally leads into this.
00:35:52.660
So what we have is a productivity crisis at its heart that is ultimately affecting the quality of life that we exist.
00:36:00.640
There's an interesting article that came out, and again, this is way off topic, but it's interesting.
00:36:04.640
It's an interesting article that just came out in the Atlantic that says, China is a nation of engineers, and America is a nation of lawyers, and the job of lawyers are to preserve wealth and to make sure that IP rights are there in place, and the job of engineers are to create the future.
00:36:18.780
So I think that speaks to that, and Canada is promptly within that realm of lawyers, not engineers.
00:36:24.480
We're part of this Western society that is no longer productive in the same way.
00:36:29.260
And so that is also, strangely, directly affecting immigration even more than our internal choices.
00:36:35.020
Well, you know, we might be able to handle it a little better.
00:36:37.320
However, as I see, Australia has done a deal with the U.S.
00:36:41.160
We could have easily done on some of our mining and resources here in Canada.
00:36:48.160
It sounds to me like you and I have other stuff to talk about.
00:36:55.120
Listen, on that topic, Mark, thank you very much for being here.
00:36:57.940
I think I just said I'm always welcome on your show.
00:37:06.140
But look, well, before we leave, please tell you you're a lawyer, real estate agent.
00:37:20.820
Yeah, the podcast is called Brave New Something.
00:37:22.940
It's just about global politics and economics and things that I'm interested in.
00:37:27.020
So I just interview various and various people.
00:37:29.120
We just had Bob Ray, the Canadian ambassador to the United Nations, on two days ago.
00:37:40.020
Well, you've got great guests and you're a great chat.
00:37:45.280
If people wanted to reach out and use your services, since you're not out there spending
00:37:49.740
their money willy-nilly on them, where can people do that?
00:37:52.880
You mean if people want to give me money for the trust accounts so that I can respond to
00:37:55.740
Florida and they'll never hear from me again, you can use LegalClosing.ca Professional Corporation.
00:38:11.420
It would be a pleasure to touch base with anyone.
00:38:16.300
And as more breaks on this or more breaks down in that industry overall, we're going to reach
00:38:22.280
It will be more interesting to speak about this after the Denton's report is released
00:38:34.120
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