The Securities and Exchange Commission has sustained the Financial Industry Regulatory Authority’s disciplinary action against J.W. Korth & Company, after finding the firm violated muni rules by charging excessive mark-ups in 38 sales of municipal securities.
The Lansing, Michigan-based broker-dealer has been fighting the 2017 FINRA hearing panel decision for five years, arguing that the panel used the wrong methodology for calculating the firm’s markups and markdowns. In addition, the firm said the prices were justified by the time and expense the firm dedicated to each bond transaction as well as the complex services it provided to its customers.
FINRA’s National Adjudicatory Council concluded in 2019 that its Department of Enforcement had established a prima facie case that markups on 38 municipal bond transactions that exceeded either 3% or 3.5% or that markdowns on 13 corporate bond transactions that exceeded 3% were excessive.
The burden was then shifted to Korth to present evidence demonstrating its fairness of pricing, which the firm said was impermissible because the markups had not exceeded 5%, the level at which markups on equities are generally presumed to be excessive.
“Korth did not introduce any expert testimony of its own to show that the markups and markdowns were nonetheless reasonable under the circumstances,” the new SEC order said. “Although Korth otherwise attempted to justify its pricing, the record establishes that neither the services it provided its customers nor market conditions justified the markups and markdowns that it charged.”
“As a result, we sustain FINRA’s finding that Korth’s pricing was unreasonable,” the SEC order said. “Because we find the sanctions FINRA imposed to be neither excessive nor oppressive, we also sustain the sanctions.”
For violating Municipal Securities Rulemaking Board Rules G-17 on fair dealing and G-30 on prices and commissions, FINRA ordered the firm to pay restitution of approximately $29,268, in addition to censuring the firm and ordering the firm to retain an independent consultant to establish pricing procedures for sales and purchases of debt securities. The SEC sustained those sanctions as consistent with the statutory requirements.
The firm responded to the SEC order noting the significant challenges of pricing at the time.
“J.W. Korth & Company is steadfast in its belief that we have never overcharged a single customer for our services,” the firm said. “The markups in question happened 11-13 years ago during one of the most turbulent financial markets in history. Those conditions required our firm to respond with all professional means at our disposal and to act, as we have always acted, in a careful, judicious manner consistent with the best interests of our customers in a rapidly changing market.”
“In its opinion the SEC noted that the National Adjudicatory Council found that our conduct ‘did not exhibit a pattern of charging excessive markups,’” the firm said. “The NAC also found that we were not intentional or reckless, that J.W. Korth attempted to calculate fair markups, we ‘had in place a policy for determining markups that it openly explained to FINRA and reliably implemented,’ and we ‘employed multiple layers of oversight for its pricing practices.’”
The firm went even further to say those trades under scrutiny and their behavior going forward is in line with what their customers expect from them.
“Our actions resulted in every customer’s trade’s providing solid returns to our customers,” the firm said. “J.W. Korth acted in the highest and best interests of its customers at all times described and continues to do so.”
