A former mutual fund rep who facilitated “stealth advising” by a former colleague from another fund dealer has been fined and banned by the Canadian Investment Regulatory Organization (CIRO).
Earlier this year, a hearing panel of the self-regulatory organization found that Zahir Hussain Lehri, a former rep with Shah Financial, violated the SRO’s rules by allowing Muhamad Sadiq — his former branch manager at a couple of fund dealers, Monarch Wealth Corp. and Sterling Mutuals Inc. — to use Lehri’s rep code to open new accounts and file KYC information for clients on his firm’s systems, to implement a leveraging strategy, and to process trades for those clients.
“[Lehri] opened and processed the accounts based on information provided by Mr. Sadiq without ever having a substantive meeting with any of the four clients. [He] also did so by using false financial information provided by Mr. Sadiq resulting in unsuitable investments,” the panel found — noting that the clients said they never met Lehri, and that Sadiq, “who was their accountant, recommended they take out loans to invest in mutual funds.”
This all amounted to facilitating “stealth advising” by Sadiq, and also meant that Lehri failed to ensure the suitability of the leveraging strategy, the SRO alleged.
According to the panel, when the pair worked together, Lehri shared his commissions with Sadiq, and they shared a bank account, which was used to pay Lehri’s registration fees. Then, after Lehri moved to Shah Financial, four clients came to him from Sadiq, who used Lehri’s access to deploy his leveraging strategy with those clients.
In 2022, a hearing panel of CIRO predecessor, the Mutual Fund Dealers Association of Canada (MFDA), sanctioned Sadiq for various violations of its rules, including misconduct involving stealth advising, and implementing an unsuitable leverage strategy with a number of clients.
As a result, he was permanently banned, fined $750,000 and ordered to pay almost $50,000 in costs.
Now, a CIRO panel has also ordered that Lehri be permanently banned, fined $185,523 (which includes $35,523 in disgorgement), and ordered to pay $25,000 in costs.
In addition to the violations stemming from the stealth advising, the panel also found that Lehri enabled the misappropriation of US$31,000 from a client, and failed to cooperate with the regulator’s investigation.
“This case is about the core values of the securities industry: the privilege and the corresponding responsibility of being an approved person. It is about the trust clients place in the hands of an approved person and the regulatory system,” the panel said in its decision on sanctions.
“In this case, [Lehri] allowed an approved person of another MFDA firm to use [Lehri’s] code, implement a leveraged strategy and make unsuitable investments which resulted in significant financial harm to the clients. His actions breached the clients’ trust in [reps], the regulatory system in which they operate and the securities industry as a whole,” it said.
The four clients lost over $150,000 on the unsuitable leveraging strategy, one former client was forced to sell their home, and another had to borrow from family to pay their loans from fund dealers. They also suffered stress and opportunity cost, the panel noted.