The Mutual Fund Dealers Association of Canada (MFDA) has levied a $750,000 fine, assessed costs in the amount of $49,662.50 and has permanently banned former dealing representative, Muhamad Asghar Sadiq for misrepresentation, misappropriation and outside business activity.

Specifically, an MFDA hearing panel found Sadiq failed to use due diligence or intentionally misrepresented the essential facts related to at least 11 different clients and he submitted supporting documents to his firm, Sterling Mutuals Inc., in connection with loan applications for at least four clients which he knew or ought to have known contained false, incorrect or misleading information.

In addition, Sadiq is accused of failing to ensure that leveraged investment strategies and the underlying investments he recommended were suitable, he misrepresented the risks, benefits and material assumptions, costs and the features of the leveraged investment strategy he recommended, and while registered as a dealing representative with Sterling, also engaged in securities related business on behalf of another member, Shah Financial Planning Inc.  

Sadiq also engaged in personal financial dealings with a client when he provided her with money to pay her investment loan payments, giving risk to a potential conflict of interest which he did not disclose. Finally, he is also accused of misappropriating more than $204,426 from seven clients and one individual.

Registered in the securities industry since 2005, Sadiq was registered as a dealing representative with Sterling Mutuals from February 2010 until his resignation in January 2019. Conducting business in the Mississauga, Ontario area, Sadiq was also registered as a dealing representative in Alberta from 2014 until 2019.

At all times, Sterling’s policies and procedures required that clients involved in leveraged strategies have a medium tolerance for risk or higher and good investment knowledge. All debt payments should not exceed 35 per cent of a client’s gross income before tax, and the leveraged amount should not exceed 50 per cent of the client’s liquid net worth or 30 per cent of the client’s total net worth.

During the period in question, Sadiq implemented a strategy that involved borrowing money to invest in return of capital (ROC) mutual funds which he failed to ensure were suitable for the clients involved. Loans taken out by the clients ranged from $50,000 to $250,000.

During the application process Sadiq misrepresented know your client (KYC) information to make it appear as though his recommendations were suitable and did not review the KYC information with client, instead providing the documents and indicating where clients should sign.

“The respondent recorded the clients’ investment knowledge as good when their investment knowledge was limited or none, recorded the clients’ risk tolerance as predominantly high when their risk tolerance was substantially lower and significantly overstated their annual income and net worth,” the MFDA’s notice of hearing states. In facilitating the loan applications, he also overstated the value of client assets and included assets the clients did not actually own. “By providing the false supporting financial documents, the respondent increased the likelihood that the lending institutions would approve the clients’ investment loans or that Sterling Mutuals would approve the implementation of the leveraged investment strategy in the clients’ accounts.” 

Total debt service ratios reached more than 114 per cent in at least one case – all clients exceeded the 35 per cent threshold mandated in the firm’s policies and procedures. Loan to net worth ratios, not to exceed 30 per cent, ranged from more than 41 per cent to almost 1,478 per cent.

“The respondent knew or ought to have known that the investment loans were excessive,” the MFDA writes. “Many, if not all of the clients did not have the means to cover the costs of servicing the investment loans in the event the leveraged investment strategy did not perform.” 

More, he also led clients to believe that the strategy was low risk or risk free, that it would limit the risk to a predetermined amount and that the distributions from the ROC mutual funds would cover the loan payments while providing additional income. 

When the strategy inevitably caused shortfalls, clients redeemed their mutual funds in their leveraged and non-leveraged accounts alike. In all cases, the proceeds were insufficient to repay the loans, resulting in all having to pay the remaining balance out of pocket or face legal action from the lending institution. At least one client involved is currently engaged in civil proceedings commenced against them.

The same pattern was repeated with five Shah clients. Collectively all of the clients at Sterling and Shah described in the MFDA’s proceedings lost approximately $449,596 while Sadiq earned at least $71,000 in commissions.

He also misappropriated at least CDN$128,426 and US$76,000 from the seven clients and one individual who thought they were investing in a trading business. The money was used to pay personal expenses and to make payments to two other advisors. “None of the monies were used in connection with any trading business,” they write.

Sadiq, who resigned from Sterling Mutuals on January 9, 2019, is not employed in the industry today in any capacity.