An irreverent Wall Street Blog
by Bill Singer
 
Join BrokeAndBroker blog on Facebook  Follow the BrokeAndBroker blog on Twitter  Connect with BrokeAndBroker on LinkedIn  Join Bill Singer on Google+  Subscribe to RSS Feed

SEC Reversed On Imposition of Bar
Written: June 12, 2013

In September 2007, the Financial Industry Regulatory Authority, Inc. (“FINRA”) (the successor to the National Association of Securities Dealers (“NASD”)) filed a Complaint with its Office of Hearing Officers charging that, in July 2006, John M.E. Saad, a regional director in the Atlanta, Georgia, office of Penn Mutual Life Insurance Company (“Penn Mutual”) and also registered with Penn Mutual’s FINRA member broker-dealer affiliate, Hornor, Townsend & Kent, Inc. (“HTK”) had violated FINRA rules by submitting false expense reports for reimbursement for nonexistent business travel and for a fraudulently purchased cellular telephone. 

The Memphis Trip -- Stumble and Fall

More specifically, in July 2006, when a scheduled business trip from his home base in Atlanta to Memphis, Tennessee, was cancelled, instead of staying home, Saad checked into an Atlanta hotel for two days. Thereafter, he submitted a false expense report claiming expenses for air travel to Memphis and a two-day hotel stay in that city. In furtherance of this fraud, Saad forged an airline travel receipt and a Memphis hotel receipt and attached those receipts to his expense report. 

Dropped Signal?

Additionally, Saad was charged with having submitted another false expense claim for the replacement of his business cellular telephone when in fact he had not replaced his own telephone but rather had purchased a telephone for an insurance agent who was employed at another firm. 

NASD Investigates

During the ensuing NASD investigation, it was alleged that Saad repeatedly attempted to mislead NASD by providing investigators with false information.

FINRA OHO Hearings

At his FINRA Office of Hearing Officers ("OHO") disciplinary hearing, Saad explained that toward the end of 2005, his sales had declined and he virtually halted business travel, which was considered a significant aspect of his professional responsibilities. In June 2006, his Penn Mutual superiors issued a production warning to him and admonished him to increase his sales of Penn Mutual products. Concurrently, Saad and his wife were caring for one-year old twins, one of whom had undergone surgery and was frequently hospitalized for a significant stomach disorder.

On August 19, 2008, a OHO Hearing Panel found that Saad had violated NASD Conduct Rule 2110 and sanctioned him with a permanent bar against his association with a member firm in any capacity. READ full-text OHO Decision.

FINRA NAC Appeal

The OHO sanction was affirmed on October 6, 2009, by FINRA’s National Adjudicatory Counsel (“NAC”), which found that there were no mitigating factors and that there were a number of aggravating factors, including “the intentional and ongoing nature of Saad’s misconduct, Saad’s efforts to deceive HTK and Penn Mutual, [and] Saad’s initial instinct to conceal the extent of his actions from state and FINRA examiners.”  READ the full-text NAC Decision.

SEC Sustains

On May 26, 2010, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) sustained the self-regulatory organization’s findings and sanctions. READ the full-text SEC Decision.

Federal Court of Appeals

In his petition for review to United States Court of Appeals For The District Of Columbia Circuit, Saad conceded his culpability and only argued that the SEC had abused its discretion in upholding the lifetime bar.  In John M.E. Saad, Petitioner, v. Securities and Exchange Commission, Respondent (U.S. Court of Appeals, DC, No. 10-1195, June 11, 2013),

The gist of Saad's appeal relied upon PAZ Sec., Inc. v. SEC (D.C. Cir., July 20, 2007), for which he cited as holding that when the SEC reviews a FINRA (NASD) disciplinary sanction, the federal regulatory must:
  • determine whether, with “due regard for the public interest and the protection of investors,” that sanction “is excessive or oppressive;” 
  • carefully consider whether there are any aggravating or mitigating factors that are relevant to the agency’s determination of an appropriate sanction, which becomes a particularly important issue when the respondent faces a lifetime bar.
Saad argued that the SEC had abused its discretion in failing to adequately address all of the potentially mitigating factors in his case and, pointedly, he pointed to:
  1. the extreme personal and professional stress that he was under at the time of his transgressions; and 
  2. the fact that his misconduct resulted in his termination before FINRA initiated disciplinary proceedings, which is a specific mitigating factor in FINRA’s Sanction Guidelines.
On appeal, the federal court of appeals found that the SEC had abused its discretion in failing to address several potentially mitigating factors.

The Court stated that when the SEC evaluates whether a sanction imposed by FINRA is excessive or oppressive, the federal regulator must do more than say, in effect, petitioners are bad and must be punished. The SEC is obligated to provide some explanation addressing the nature of the violation and the mitigating factors presented in the record. Pointedly, the SEC “must be particularly careful to address potentially mitigating factors before it affirms an order . . . barring an individual from associating with a[] . . . member firm – the securities industry equivalent of capital punishment.”

The Court further took the opportunity to note the distinction between the imposition of a penalty and that of a remedial sanction when it reminded the SEC that the regulator may approve “expulsion not as a penalty but as a means of protecting investors . . . . The purpose of the order [must be] remedial, not penal.” Id. at 1065. If the Commission upholds a sanction as remedial, it must explain its reasoning in so doing . . . “

In granting Saad’s petition and remanding the case to the SEC for futher consideration, the Court admonished on pages 15 -17 of its Opinion that:

After careful review of the record before us, we conclude that the case must be remanded for further consideration by the SEC. Remand is warranted because the decision of the Commission – as well as those of the FINRA Hearing Panel and the NAC – ignores several potentially mitigating factors asserted by Saad and supported by evidence in the record. We have previously cautioned that the SEC “must be particularly careful to address potentially mitigating factors” before affirming a permanent bar. PAZ I, 494 F.3d at 1065. The SEC has failed to do so in this case. In particular, Saad correctly notes that FINRA and the SEC failed to consider that “Mr. Saad’s firm, HTK[,] disciplined him by terminating his employment in September of 2006, prior to regulatory detection.” Br. of Pet’r at 34; see also Reply Br. at 12-13. Under the FINRA Sanction Guidelines, number fourteen of the “Principal Considerations in Determining Sanctions” is “[w]hether the member firm with which an individual respondent is/was associated disciplined the respondent for the same misconduct at issue prior to regulatory detection.” SANCTION GUIDELINES 7. The SEC’s decision acknowledges this argument: “[Saad] claims FINRA also failed to consider that HTK had fired him before FINRA detected his misconduct . . . .” Saad, 2010 WL 2111287, at *7. However, the SEC’s decision says nothing more regarding this issue, nor do the decisions issued by the Hearing Panel and the NAC. When questioned about this point at oral argument, SEC counsel mistakenly argued that the termination was “irrelevant” because it occurred after the violation. See Oral Arg. at 19:45 - 23:40. The Guidelines say otherwise.

Similarly, the SEC’s decision noted, but did not address, Saad’s argument that “he was under severe stress with a hospitalized infant and a stressful job environment.” Saad, 2010 WL 2111287, at *7. The Guidelines do not expressly mention personal stress as a mitigating factor, but they are by their own terms “illustrative, not exhaustive; as appropriate, Adjudicators should consider case-specific factors in addition to those listed.” SANCTION GUIDELINES 6.

In response to Saad’s argument that the SEC ignored these potentially mitigating factors, the Commission weakly responds that it “implicitly denied that they were [mitigating] when it stated that it denied all arguments that were inconsistent with the views expressed in the decision.” Br. of SEC at 24. This contention is not an acceptable explanation for the SEC’s failure to provide “reasoned decisionmaking” in support of a lifetime bar. See Allentown Mack, 522 U.S. at 374-75.

When we explained in PAZ I that the SEC “must be particularly careful to address potentially mitigating factors,” we meant that the Commission should carefully and thoughtfully address each potentially mitigating factor supported by the record. The Commission cannot use a blanket statement to disregard potentially mitigating factors – especially those, like an employee’s termination, that are specifically enumerated in FINRA’s own Sanction Guidelines. Because the SEC failed to address potentially mitigating factors with support in the record, it abused its discretion by “fail[ing] to consider an important aspect of the problem.” See State Farm, 463 U.S. at 43. We must remand on that basis.

We take no position on the proper outcome of this case. We leave it to the Commission in the first instance to fully address all potentially mitigating factors that might militate against a lifetime bar. . .


Topics: Saad  FINRA  SEC  Bar  Appeal  PAZ  BrokeAndBroker  Bill Singer  OHO  NAC  
 
[^top^]

Previous Entries
September 2, 2014
Stockbroker, Compliance, Legal, and Regulatory JobsEmployment Page BrokeAndBroker.com Jobs#wallstreetjobs @brokeandbrokerNOTICE TO EMPLOYERS... Read On
August 30, 2014
Stockbroker Wins Expungement of 1990 Customer ComplaintAugust 29, 2014You know how you figure something's foolproof? For example, I recently left for ... Read On
August 29, 2014
You know how you figure something's foolproof? For example, I recently left for vacation and set a week's worth of articles on the BrokeAndBroker.com ... Read On
August 28, 2014
On June 24, 2014, the Financial Industry Regulatory Authority (“FINRA”) Department of Enforcement filed a Complaint against James M. Katayanagi, who, ... Read On
August 27, 2014
What's A JP Morgan employee and a customer's debit card have to do with smoking too much dope and singing about it on the old Lawrence Welk show? Well... Read On
August 26, 2014
Stockbroker, Compliance, Legal, and Regulatory JobsEmployment Page BrokeAndBroker.com Jobs#wallstreetjobs @brokeandbrokerNOTICE TO EMPLOYERS... Read On
BrokeAndBroker.com Job Search
Related Topics
Tag Cloud
Internet FINRA Bear Stearns Bloomberg SEC NASD NYSE Money Laundering Due Diligence Waiver Forbes China Chepucavage Broy Woody Allen Madoff NAC NPR Marketplace Stanford UBS Ketchum Antitrust NASDAQ RRBDLAW Schapiro Bill Singer BrokerAndBroker USERRA Brokeandbroker.com Morgan Keegan Arbitration Counterclaim BrokeAndBroker.com Khuzami BrokeAndBroker Aleynikov Goldman Sachs brokeandbroker Promissory Note U4 Bill SInger EFL CFTC Huffington Post Flash Crash arbitration RBC RRBDLAW.com Ponzi Affinity Fraud Wachovia Raymond James BrokeandBroker.com Expungement Fraud Securities Fraud Outside Business Activity Registered Rep Magazine FOREX BrokerAndBroker.com FBI Banc of America Pro Se Supreme Court Morgan Stanley Smith Barney E*Trade Margin email Galleon Penson U5 Defamation Protocol Wells Fargo Punitive Damages Citigroup Merrill Lynch ARS Employee Forgivable Loan Street Legal Morgan Stanley AWC Fidelity Bankruptcy Broke And Broker HFT David Sobel Day Trading Ameriprise Commissions Spouse Schwab Commission CRD Kenneth Starr IRS CNBC Complaint ATM Skimming Hacking Phishing Malware Naskovets Poteroba Koval Lincoln Financial Selling Away Outside Business Activities Rakoff 2nd Circuit Second Circuit IRA 401k Forgery Tax RRBDlaw.com Email Netschi Moore Whistleblower Street Sweeper Tran Bharara Facebook Online Bonus Eligibility Rule TD Ameritrade Hedge Fund SAC 1099 Smith Barney Lehman Brothers IC3 Scottrade Lehman JPMorgan Chase Hertz Insider Trading Bank of America Department of Justice Elles Bribe Auction Rate Securities Raiding Spam Edward Jones Medicare Diabetes Dow Schumer Walter Bid Rigging Real Estate Discrimination Wall Street Statutory Disqualification Form U4 Form U5 Indictment Boyland DOJ Corruption bill singer FTC Do Not Call FINRA Arbitration Costa Rica Settlement LIBOR Varney Plea Rule 8210 RRBDlaw Appeal Fowler LPL Johnson US Airways Reg D MSSB Vault Loan SunTrust Discovery Employment Rosenthal Recruiting Lawyer Trading Platform JP Morgan Employment Tuesday Wrongful Termination Bank Guarantee WaMu Solicitation REIT Martin Credit Cards Away Account Credit Repair PN Advisor Placement Group Forex Mortgage Private Placement Moon Merrill Anderson Exam Lee Borrowing Tax Lien Conversion Oppenheimer Wedbush Felony Misdemeanor Expenses ING Lien OTR Estate Jobs Florida Credit Card Elderly Flash Drive Annuity Reimbursement FNMA BrokeAndBroke TIC DWI Promissory Notes Suitability Will POA Power of Attorney Casino NSF MF Global Counterfeit Preet Bharara Corzine Hacker RIA Prison Disclosure NASAA Aguilar FCPA Subway Identity Theft Gold Dell Bar Injunction Bank Deutsche Bank God HSBC Private Placements Eric Stein Wire Fraud CCO Joshua Brown Backstage Wall Street Obstruction of Justice Reuters Retaliation Variable Annuity Outside Account Options Telephone Wine Social Media ADA Pacifico Non-Prosecution Agreement Confirm Tax Fraud Retirement OBA Equity Indexed Annuities EIA MetLife Continuing Education OIP Tax Liens Willful CE Unregistered Impersonation Annuities BBVA Business Expenses ETF JOBS Act Mail Fraud Parking Variable Annuities Signatures BitTorrent Impersonator Wire Transfer Wire Crowdfunding Nasdaq Away Accounts WSP Laptop Dodd Frank Checks RMBS PST Solicited Unsolicited Congress SRO Wife Discretion Non-Solicitation Restaurant Commodities Private Securities Transaction Offer of Settlement Money Market employment jobs Great Recession Chase Investment Services Arrest Barclays Liens Failure To Supervise Apple Time And Price T&P Willfully Husband Letter of Authorization LOA Sexism Debit Card Knight Test Practice Sale Unfair Competition Signature Judgments Undisclosed Settlement Trainee Fee Trust Laser Side Bar Mattera Female Sales Assistant Kennedy Charge Sexist NML Argentina Embezzlement Silver Judgment Bank Fraud Deceased TSSB Mary Jo White Trustee Frumento Conspiracy 6th Circuit Proctor Rule 3040 Class Action Beneficiary NYAG Schneiderman Gallagher White Short Sale Compromise Website TRO Supervision Vacatur SDNY BrokeAndBroker Bill Singer Piwowar Rule 1122 Article V signature VA Regulation SP Rule 3270 OWB Stockbrokers
 
Email Bill Singer Connect with Bill Singer on Facebook Follow Bill Singer on Twitter Link up with Bill Singer on LinkedIn Join Bill Singer on Google+