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.
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.
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.
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
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:
- the extreme personal and professional stress that he was under at the time of his transgressions; and
- 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. . .