MFDA throws the book at a long-time advisor for doing something someone in his position should have known was completely offside.
“Sixty per cent of the Respondent’s assets under administration were leveraged investments,” said the MFDA in its Decision and Reasons statement of June 1, 2015. “We find that he [David Karas] was a strong promoter of leveraged investments.”
The sanctions laid down yesterday by the SRO were in response to allegations made by MFDA enforcement staff that former Barrie advisor David Karas put 18 clients over a six-year period into a leveraged investment strategy without adequately explaining how these investments worked and failing to follow the KYC documents for these 18 clients which clearly demonstrated the unsuitability of these investments contrary to MFDA Rules 2.2.1 and 2.1.1.
For these actions David Karas has been permanently prohibited by the MFDA from working for an MFDA member firm, fined $750,000 and responsible for $20,000 in costs.
“I personally use nothing but mutual funds for investing my borrowed monies. And those funds have a proven past performance over the past many years averaging 15-20 percent per year. Those facts are not debatable; those are published facts and can be found regularly in your financial newspapers,” Karas told clients when discussing leveraged investments. “So, today I can borrow money from banks and trust companies at seven percent. Because it’s tax deductible, my true cost is 3.5 percent (after taxes). Invested in investment funds that average just 10 percent, it means I make 6.5 percent on Other People’s Money (OPM). Needless to say I like using OPM; maybe you should too.”
A veteran advisor, Karas was a mutual fund salesperson from July 1988 through April 2010 when he was terminated by Investia Financial Services in part because of the allegations brought by the MFDA. In addition to Karas’ role as a mutual fund salesperson, the advisor was a branch manager for the Barrie office of Investia between 2002 and 2008, the years in which these infractions took place.
This latest example comes hot off yesterday’s story
about a Windsor advisor who got four retired clients to mortgage their homes in order to buy return on capital mutual funds. It seems some advisors fail to understand that leverage cuts both ways.
Not surprisingly, the financial downturn in 2008 coincided with the winding down of the advisor’s investment strategy. Before the correction, Katas had approximately 1,100 client families and $180 million in assets under management while the entire Money Concepts office was responsible for 3,800 client families and $328 million in AUM.
An advisor with this kind of stature should have known leveraging was inappropriate for these 18 clients.
“Useful tools in determining whether the client can afford the loan are ratios of debt service obligations to income and loans to net worth, “commented the MFDA in its Decision and Reasons statement. “When the Respondent was asked if he calculated them in determining whether a particular loan ‘was suitable for the client?’ he replied ‘No. We weren’t asked to’.”