J.W. Korth Company a securities broker dealer headquartered in Lansing Michigan has been censured by Financial industry Regulatory Authority (FINRA) according to a National Adjudicatory Council Decision affirming a Hearing Panel’s findings of the firm overcharging customers on municipal and corporate debt securities transactions effected in customers’ accounts. In the matter of Department of Enforcement v. J.W. Korth Company. Complaint No. 2012030738501 (May 22, 2019).
According to the National Adjudicatory Council Decision, customers had been excessively charged markups by J.W. Korth on thirty eight municipal securities sales. Evidently, customers were also excessively charged markups on nine corporate debt securities, and assessed excessive markdowns with respect to four corporate debt securities purchases.
Evidently, the firm’s policy on charging markups and markdowns called for the firm to take into account the fair treatment of customers. Nonetheless, customers were overcharged on the transactions. For example, in one case, 300,000 bonds had been purchased by the firm and then sold to customers a day later at markups ranging between 4.12 and 5.58 percent. In another case, 60,000 bonds were purchased by the firm and sold about a day later to a customer at a markup of 5.47. One customer was reportedly charged an 8.33 percent markup on the purchase of 25,000 bonds from the firm. Throughout this time, the firm’s policies generally disallowed stockbrokers from charging more than 3.9% markups on bond transactions.
FINRA noted that the reasonableness of the prices charged on the securities transactions was determined by, inter alia, the yield to the customer; profits for the stockbroker; expenses pertaining to the transactions; the prevailing market rates on the securities; and the types of securities involved in the transactions. Also, FINRA indicated that under NASD IM-2440-1, markups exceeding five percent were generally considered unreasonable and unfair; however, it was possible for markups less than five percent to still be unreasonable. The Decision further noted SEC and FINRA’s position that markups of five percent or more were likely reasonable only in extraordinary circumstances, especially given the lower markups normally charged for debt securities.
FINRA’s Hearing Panel issued a Decision finding that J.W. Korth overcharged customers because the firm had no adequate justification for its markups and markdowns. The National Adjudicatory Council affirmed the Hearing Panel’s Decision in this respect, finding the firm’s conduct violative of FINRA Rules 2010, NASD IM-2440, NASD Rule 3440, and MSRB Rules G-30 and G-17.
