## Facts

- Kenneth Craig Krull was a registered securities representative and branch manager at an NASD member firm’s Marysville, Washington office.
- From November 1990 to July 1993, Krull recommended more than 100 mutual-fund “switches” for eight customers across ten accounts; customers consistently followed his recommendations.
- Many of the mutual funds were front-end loaded (purchase-time sales charges); at least one carried a deferred sales charge if sold within a specified period.
- Customers held the funds for relatively short periods (about ten months on average) despite the funds’ long-term investment objectives.
- Each transaction used a signed switch form, but Krull did not follow firm policies intended to limit switching, require customer-initiated short-term trades, and route switch forms to the home office for review.
- A representative example involved coordinated purchases and later sales of the Franklin Rising Dividends Fund across all affected customers, producing repeated sales charges and short holding periods.
- Although customers generally profited in absolute terms, the record supported that transaction fees materially reduced returns compared to a buy-and-hold approach.
- In disciplinary proceedings, Krull could not provide a customer-objective-based rationale explaining the pattern of switches.

## Issues

1. Whether substantial evidence supported the SEC’s determination that Krull’s mutual-fund switching was unsuitable under NASD Rules of Fair Practice.
2. Whether the SEC-imposed sanctions were unwarranted in law or without justification in fact.

## Decision

- The Ninth Circuit denied the petition for review and affirmed the SEC’s order.
- The court held substantial evidence supported the finding that Krull engaged in a pattern of unsuitable switching and excessive trading.
- The court held the sanctions—restitution of $81,705, a $20,000 fine, and a one-year suspension—were not unwarranted in law and were justified by the record.

## Legal Principles

- In reviewing SEC affirmance of NASD discipline, appellate review is limited: factual findings are upheld if supported by substantial evidence.
- An SEC-approved sanction will be affirmed unless it is unwarranted in law or without justification in fact.
- Under NASD suitability standards, repeated switching among mutual funds can be unsuitable where it lacks a rational customer-based investment purpose and imposes unnecessary sales charges and costs.
- Customer consent to transactions and the existence of some overall profit do not, by themselves, negate unsuitability where the trading pattern primarily generates avoidable costs and reduced returns.

## Conclusion

The Ninth Circuit upheld the SEC’s determination that Krull’s multi-year pattern of switching customers among loaded mutual funds was unsuitable because it imposed unnecessary costs without a coherent customer-focused rationale, and it affirmed restitution, a fine, and a suspension under deferential review standards.


Krull v. Sec. & Exch. Comm’n, 248 F.3d 907 (9th Cir. 2001)