I will try to post a picture of the waterfall in the gallery section.

I am not aware of the coating material you are asking about, only a black foam in a can that is used to seal around waterfalls.
If it was installed by a contractor, shouldn't they stand behind it?
The right way to fix it is to add a liner under the hole structure and down over the pond liner like a shingle.

I got the water table down below the hole thank goodness. I will add the pond great stuff into the hole and probably next Summer I will have the waterfall reconstructed as you say Mike. You are totally right. That is the way to get it done correctly.

I am going to get my lfs guy to divert some of the water leading to the waterfall into the veggie filter lowering the level even further.

I would prefer that my contractor never return because:
He lied about what he put into the filter box and then when I showed him the truth, he told me that I was over reacting.
He waited until I was at work to create the waterfall and installed a cheap basement sump pump instead of a quality pond pump which died a month after the warranty expired (less than a year). And when I called him about this he informed me that he did not want an old dead pump and had no intention of coming to get it out unless I was going to buy another pump from him.
He pretty much tried to patronise me the entire time he was here, putting down all of my requests and wishes (such as keeping the liner around the waterfall at least 12" above the water level)
He tried to get me to buy my liner from him and got cranky when I got one at 1/3 the price from another source...then tried to tell me that my liner was not as good as the one he could have gotten.
He gossiped about all of his other customers (this is a small friendly town full of nice people but he seemed to find something horrible to say about them) constantly as he worked. He laughed when he talked about the look on a retired man's face when he told him what he would charge to do his yearly pond maintenance.
Had he done what I requested in terms of the waterfall liner, I would not be covered in mud right now :).
Sometimes the customer is not wrong.
End of rant.
Nonetheless, I do not want to engage him in any way despite his poor work. I will fix and repair on my own with help from people who don't mind listening and discussing the project with me.

Thanks for listening.
I love my pond and I love the hobby. My veggie filter is clearing up the water fast and that makes me so happy!
Its amazing how being in the fresh air working with this pond makes me feel.

Well Karen, I guess there are good and bad contractors and yours was the latter. I was fortunate enough to have found a real good one only 10 miles from my house.

I hope you don't have problems with large water loss or undercutting of the liner in the mean time.

PS Nice rant! It painted clear picture of your disappointment.