SEC Reversed Again by the D.C. Circuit

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 principal.

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 terminated him.

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 considered.

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 proceedings.

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