The SEC lost another case in the D.C. Circuit Court of
Appeals. This time, however, it did not involve rule making. Rather, the action
focused on the imposition of a life time bar from the securities business by
FINRA which was affirmed by the Commission on appeal. Saad v. Securities and
Exchange Commission, No. 10-1195 (D.C. Cir. Decided June 11, 2013).
The case is based on the largely undisputed fact that
John Saad submitted several false expense claims to his employer and later
tried to conceal the wrongful conduct. Mr. Saad had been employed by Penn
Mutual and registered with its broker-dealer affiliate, HTK, a FINRA member. He
was registered as an investment company products and variable contracts limited
representative, a general securities representative and a general securities
In July 2006 Mr. Saad was scheduled to make a business
trip. It was canceled. Mr. Saad then checked into a hotel for two days. Later
he submitted expresses for air travel not taken and a two-day hotel stay in
Memphis, the city to which he had been scheduled to travel. The submission
contained a forged airline travel receipt and other documents he claimed
supported the expenses. Later the firm discovered the falsification and
FINRA investigated. During the inquiry Mr. Saad attempted
to cover-up the falsification. He repeatedly mislead FINRA investigators.
In September 2007 FINRA brought a disciplinary proceeding
against Mr. Saad alleging "conversion of funds in violation of NASD Conduct
Rule 2110. A hearing panel found against Mr. Saad and imposed a permanent bar
against association with a member firm in any capacity. That conclusion was
affirmed by the NAC.
The Commission affirmed. In reaching its conclusion the
SEC rejected Mr. Saad's claim that there were mitigating circumstances which
should have been considered in assessing the penalty.
The propriety of the life time bar was a critical issue
before the Circuit Court. In reviewing a ruling regarding a sanction the Court
began "[w]e do not limit the discretion of the Commission to choose an
appropriate sanction so long as its choice meets the statutory requirements
that a sanction be remedial and not 'excessive or oppressive." At the same time
the Court stressed, the "Commission must be particularly careful to address
potentially mitigating factors before it affirms an order . . . barring an
individual . . . "
The Commission is also required to explain the reasons a
sanction is remedial in affirming a bar. Under the applicable statute, the SEC
can affirm the bar not as a penalty but as a means of protecting investors.
Stated differently, the sanction must be remedial, not penal. "If the
Commission upholds a sanction as remedial, it must explain its reasoning in so
doing; as the circumstances in a case suggesting that a sanction is excessive
and inappropriately punitive become more evident, the Commission must provide a
more detailed explanation linking the sanction imposed to those circumstances"
the Court held. At the same time the SEC need not explain the reasons a lesser
sanction is in appropriate.
In this case the decision of the Commission, as well as
that of the FINRA Hearing Panel and the NAC, ignores potential mitigating
factors asserted by Mr. Saad and supported by the record. This is contrary to
established precedent in the D.C. Circuit. Here Mr. Saad established that he
had been terminated by his employer prior to any action by FINRA, a point that
was not considered. Yet under FINRA Sanction Guidelines this factor must be
Similarly, the SEC's decision referenced, but did not
address Mr. Saad's contention that he was under severe stress at the time of
the incident. While this factor is not specifically mentioned in the FINRA
Sanction Guidelines, those are only illustrative and not exhaustive. This
factor should have been considered.
The Commission claims that it "implicitly" considered and
denied these points. That is not sufficient. "Because the SEC failed to address
potentially mitigating factors with support in the record, it abused its
discretion . . . " Accordingly, the Court remanded the case for further
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For more commentary on developing securities
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