The Mutual Fund Dealers Association of Canada (MFDA) has permanently banned a financial advisor from conducting securities-related business in any capacity under the MFDA’s jurisdiction and imposed a fine of $750,000 with costs of $20,000 on the advisor, who promoted leveraged investment strategies that resulted in an estimated loss of $1 million for 18 clients.
The MFDA found that David Karas, who operated under the name of Money Concepts (Barrie) in Barrie, Ont., encouraged clients to borrow money and invest those funds in mutual funds and segregated funds between 2002 and 2008. Clients were told the distributions from the mutual funds would cover the cost of borrowing and that the increasing value of those mutual funds would eventually be worth more than the outstanding balance of the loans.
However, once the global financial crisis hit in 2008, the proceeds from those loans decreased and were not enough to pay the costs associated with the investment loans. Throughout the course of its investigation, the MFDA found that the total loss of declining securities’ values for nine of clients was $579,714. In its decision, the MFDA states it would be reasonable to expect that the total loss for the 18 clients in question was more than $1 million.
“Because the conduct of the respondent was so egregious, so persistent, so general and so contrary to the fundamental responsibility of the financial advisor, it is our opinion that the respondent must be permanently removed from any securities business over which the MFDA has jurisdiction,” states the MFDA in its decision released on Monday.
There were two allegations levied against Karas:
1. That he “misrepresented, failed to fully and adequately explain, or omitted to the explain the risks, benefits, features and costs of leveraged investment recommendations that he made to at least 18 clients,” states the MFDA. This resulted in a failure to ensure these recommendations were suitable and in keeping with the clients’ investment objectives, contrary to MFDA rules 2.2.1 and 2.1.1.
This includes the risk that mutual funds may reduce, suspend or cancel distributions, and that the mutual funds could decline in value over time.
“With various degrees of emphasis, he led [investors] to think that if there was any risk at all, it was minimal,” the MFDA decision states.
2. The investment strategies were not suitable for the 18 clients in question and Karas failed to consider clients’ “know your client” information and financial circumstances, also contravening MFDA Rules 2.2.1 and 2.1.1.
This included, but is not limited to, the clients’ ability to afford the costs associated with the investment loans, regardless of investment performance; clients’ ability to withstand any losses without jeopardizing their financial security; and clients’ age, investment objectives and personal financial circumstances.
“[Karas] avoided his responsibility by delegating it to the lender or by abdicating it to the client,” the MFDA’s decision states.
This is not the first time this case has made the headlines. In 2012 and 2013, Karas was a defendant in a class-action lawsuit along with James Stephenson, co-owner of Money Concepts (Barrie), and Quebec City-based Investia Financial Services Inc., which acquired the company that owned Karas’ practice in 2008. In August 2013, the Ontario Superior Court approved a settlement of $10 million for the recovery of client losses to some 760 clients who brought the lawsuit forward.
See: Leveraging’s hard lessons
The MFDA’s decision provided an update on the matter, stating it understands that clients who participated in the lawsuit recovered approximately 10% of their losses but it is not known whether Karas made any contribution to the settlement fund.
The MFDA’s decision notes that Karas was a well-known advisor in the Barrie community who had published books promoting leverage investment strategies. He was registered as a mutual fund salesperson from July 1988 to April 2010 and as a branch manager from August 1993 to April 2010. He has been licensed in the insurance industry since about July 1987. Investia terminated Karas on April 12, 2010, in part because of the events described in this case.