Krull v. Securities and Exchange Commission

Kenneth Krull (defendant) was a registered securities representative employed with the Marysville, Washington, office of Investment Management and Research, Inc., a member firm of the National Association of Securities Dealers, Inc. (NASD). From November 1990 through July 1993, Krull initiated a number of transactions involving common stock mutual funds on behalf of eight customers. Each mutual fund was either front-end loaded, meaning that the purchase of shares in the mutual fund carried a transaction fee, or subject to a contingent deferred sales charge if sold within a six-year period. Through executing what was known as a switch form, all eight customers consented to Krull trading in such mutual funds on their behalf. On average, the customers owned the mutual funds for slightly over 10 months. Krull’s customers all profited from his transactions in absolute terms. However, the customers all paid Krull substantial transaction fees and generally did not profit as much as they would have if they had simply bought and held the mutual funds long-term. The District Business Conduct Committee (DBCC), part of the NASD’s regulatory arm, initiated disciplinary proceedings against Krull on the basis that Krull engaged in unsuitable trading on his customers’ behalf for the purpose of generating fees and commissions. During the DBCC hearing, Krull was unable to provide any rational explanation for the trading activity. Ultimately, the DBCC found that over a hundred of Krull’s trades were unsuitable. Krull appealed the DBCC’s decision to the Securities and Exchange Commission (SEC) (plaintiff). The SEC independently reviewed the record and likewise found that Krull’s mutual fund trading was unsuitable. The SEC issued an order of restitution in the amount of $81,705, a fine of $20,000, and a one-year suspension. Krull then petitioned for review of the SEC’s order.