Failed leverage strategy ends in sanctions

A former mutual fund representative has been fined and permanently banned after a hearing panel of the Mutual Fund Dealers Association of Canada (MFDA) found that he violated numerous rules, between 2011 and 2019, in connection with a failed leveraged investing scheme.

An MFDA hearing panel ordered that Muhamad Asghar Sadiq, a former rep with Sterling Mutuals Inc. in Mississauga, Ont., should be banned, fined $750,000 and ordered to pay almost $50,000 in costs following a proceeding that concluded he violated numerous rules.

Among other things, the panel found Sadiq failed to ensure that a leveraged investing strategy recommended to clients was suitable, submitted loan documentation that contained false information, and engaged in personal financial dealings with one client by providing her with money to cover investment loan payments.

It also found he misappropriated funds from clients and engaged in unregistered business for another dealer by recommending the same leveraged investing strategy to some of its clients.

The panel issued its decision on the allegations against Sadiq and imposed penalties, but hasn’t yet issued its reasons for those rulings, saying they’ll be published “in due course.”

According to the MFDA’s allegations in the case, Sadiq implemented a leveraged investment strategy for clients that involved borrowing to invest in return of capital mutual funds, which were supposed to pay distributions that would cover the loan payments.

However, the regulator alleged that clients lost money when the distributions fell short of the amounts needed to cover the loan payments, and they had to start servicing the loans with income or other debt.

When some of the clients could no longer cover the loan payments, they sold the funds and were left with loan balances to pay off.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.