The Amazing Mobius Strip Of Wall Street Regulation

March 18, 2015

This is an update of "SEC Reversed On Imposition of Bar" ( Blog, June 12, 2013). It is a saga that starts in 2006 with alleged business expense misconduct; and then, from 2007 through 2015 moves through an investigation, Complaint, hearings, and appeals. In a bit of mathematical magic, we seem to have traveled twice around a circle only to find ourselves at the end of the beginning of the beginning of the end -- the amazing Mobius Strip of Wall Street Regulation.

Case In Point

In September 2007, the Financial Industry Regulatory Authority, Inc. ("FINRA") filed a Complaint charging that, in July 2006, John M.E. Saad, a regional director in the Atlanta, Georgia, office of Penn Mutual Life Insurance Company 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.

Not Walking In Memphis

The FINRA Complaint alleged that in July 2006, Saad had scheduled a business trip from his home base in Atlanta, Georgia to Memphis, Tennessee; however, the trip was cancelled. Instead of staying home, Saad allegedly 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, FINRA charged Saad 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. Apparently, Saad purchased the cell phone for a woman who was starting in the insurance business at AFLAC because he believed he had an opportunity to assist a potential independent agent and gain an introduction to sell Penn Mutual products to one of the top AFLAC offices. Hey, don't ask -- I'm just reporting what was alleged.

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. FINRA Department of Enforcement, Complainant, v. John M. E. Saad, Respondent (OHO Decision No. 2006006705601 / August 19, 2008)

On August 19, 2008, a OHO Hearing Panel found that Saad had violated NASD Conduct Rule 2110. As set forth in the OHO Decision:

The Hearing Panel finds that Enforcement met its burden of showing by a preponderance of the evidence that Respondent violated NASD Conduct Rule 2110 when he submitted a false expense report and false receipts, and accepted reimbursement for $1,144.63 in expenses to which he was not entitled.

Page 2 of the OHO Decision

Having found Saad guilty as charged, the OHO Hearing Panel sanctioned him with a permanent Bar against his association with a member firm in any capacity. In imposing the Bar, the Panel explained that:

The Hearing Panel recognized that Respondent was under a great deal of pressure to produce and was under additional pressure due to the illness of his one-year old son. However, at the time that Respondent engaged in this misconduct, he was a registered principal, as well as a registered representative and must have known that he was engaging in misconduct. The Hearing Panel finds that Respondent deliberately decided to deceive his employer in two separate reimbursement transactions, once with the false travel expenses and again with the cell phone. . .

Page 10 of the OHO Decision


Among the issues that Saad raised on appeal from the OHO to FINRA's National Adjudicatory Counsel ("NAC") was his argument that:

[E]nforcement unfairly implied that he was guilty of spousal infidelity and that this prejudiced the Hearing Panel. He contends that, by entering into the record Saad's July 9, 2006 receipt showing Saad's purchase of four beverages in an Atlanta hotel lounge and asking Saad why he spent two nights (July 9 and 10) in a hotel room just miles away from his home, Enforcement intimated that Saad had been unfaithful in his marriage, possibly with Person A, the woman for whom he purchased a cell phone that same week. Saad further criticizes Enforcement for failing to contact Person A to ask her about her relationship with Saad. Saad argues that, in all, Enforcement's suggestions prejudiced him before the Hearing Panel. We reject Saad's argument of prejudice.

Under FINRA's procedural rules, the Hearing Officer was to admit into the record relevant evidence and exclude evidence that was irrelevant, immaterial, unduly repetitious or unduly prejudicial. See NASD Rule 9263. The Hearing Officer properly admitted the evidence at issue, which was both relevant and material. The July 9, 2006 lounge receipt was relevant to whether Saad was in fact in Atlanta or Tennessee on July 9, and [*14] the fact of Saad's initial efforts to submit this receipt to Penn Mutual for reimbursement demonstrates Saad's willingness to use false receipts to obtain reimbursement to which he was not entitled. We find nothing inappropriate in the nature of Enforcement counsel's questions regarding the receipt and Saad's Atlanta hotel stay. Saad himself suggested that his Atlanta hotel stay was a "legitimate" business expense because he worked out of the hotel room. Enforcement counsel's questions were factual and did not include suggestions of any type regarding Saad's relationship with Person A or Saad's marriage. Furthermore, Saad cites no evidence to support his theory that the Hearing Panel was somehow prejudiced by the inclusion in the record of this evidence. We reject Saad's argument of prejudice. See John D. Audifferen, Exchange Act Rel. No. 58230, 2008 SEC LEXIS 1740, at *42 (July 25, 2008) (rejecting argument that evidence of respondent's personal relationship with customer was prejudicial).

Page 5 of the NAC Decision

On October 6, 2009, the NAC affirmed OHO's sanctions Bar; and found that there were no mitigating factors but, to the contrary, 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." FINRA Department of Enforcement, Complainant, v. John M. E. Saad, Respondent (NAC Decision No. 2006006705601 / October 6, 2009). READ the full-text NAC Decision.

SEC Sustains

On May 26, 2010, the Securities and Exchange Commission ("SEC") sustained FINRA's findings and sanctions. In the Matter of the Application of John M. E. Saad For Review of Disciplinary Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 62178; Admin. Proc. File No. 3-13678 / May 26, 2010). In sustaining FINRA's actions, the SEC rejected, among other arguments on appeal, Saad's contention that:

"the record supports that indisputable mitigating factors exist pursuant to the Guidelines which neither FINRA nor the NAC chose to address." In particular, Saad argues that his misconduct was an "aberrant" lapse in judgment and that, "[w]hile he is not looking for a reward for doing what he should have been doing, it is important to note that he engaged in this conduct during an extremely short period of his career while he was under severe stress with a hospitalized infant and a stressful job environment." He claims FINRA also failed to consider that HTK had fired him before FINRA detected his misconduct and that his misconduct did not involve customers or large amounts of money.28

Page 13 of the SEC Opinion

In considering Saad's assertion that FINRA should have given greater weight to what he ascribes as "mitigating factors," the SEC found that:

Saad engaged in highly troubling conduct that raises serious doubts about his fitness to work in the securities industry, "a business that is rife with opportunities for abuse."31 Saad lied to his employer about going on a recruiting trip, and he fabricated receipts, submitted a falsified expense report, and accepted unjustified reimbursement as a result of that lie. Saad also sought reimbursement for a cell phone he misled his employer into believing he purchased for himself through a falsified receipt and expense report, and Saad attempted, at least initially, to recoup money he spent at an Atlanta-area hotel lounge at the same time he claimed he was in Memphis. After his employer caught and fired him, Saad further misled investigators by telling them he sought reimbursement for a trip that "had yet to occur" and by denying that he had purchased the cell phone for someone other than himself.32 As FINRA summarized, "Saad's actions reveal a willingness to construct false documents and then lie about them that suggests that his continued participation in the securities industry poses an unwarranted risk to the investing public."33

Page 14 of the 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 (D.C. Circuit Opinion, 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 disciplinary sanction, the SEC 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.
Abuse of Discretion

The Circuit Court 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."

Remedial Not Penal

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 further consideration, the Court admonished 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. . .

Pages 15 -17 of the Court Opinion

From FINRA to the SEC To the Circuit Court To the SEC To FINRA

The Court remanded the proceeding to the SEC for further consideration. Pointedly, the Court found that although FINRA and the SEC had acknowledged the existence of Saad's claim in mitigation that his employer had fired him before FINRA had detected any misconduct, neither the SEC or FINRA addressed said claim. Further the Court admonished the SEC for not addressing Saad's claim that he was under severe stress because of the hospitalization of his child and his job environment.


In response to the remand from the Court, the SEC remanded to FINRA only the issue of the self-regulatory organization's imposition of a Bar and sought an explanation as to the appropriateness of that sanction based upon FINRA's "Sanction Guidelines" and Saad's claim of mitigation. In the Matter of the Application of John M. E. Saad For Review of Disciplinary Action Taken by FINRA (Order Remanding to FINRA, Securities And Exchange Commission, '34 Act Rel. No. 70632; Admin. Proc. File No. 3-13678 / October 8, 2013). Pointedly, the SEC cited five questions to FINRA:

(1) When considering Principal Consideration Number 14 of FINRA's Sanction Guidelines (which concerns the consideration of whether a member firm disciplined an associated respondent prior to regulatory detection), does that guideline apply as to the member firm, the associated person, or both (e.g., does the guideline apply when determining whether (a) the member firm's misconduct was mitigated because the firm disciplined an associated person before regulators detected the misconduct, (b) the associated person's misconduct was mitigated because the firm had already disciplined the associated person, or (c) either the member firm's or the associated person's misconduct was mitigated by such disciplinary action)?

(2) In light of FINRA's finding as to question (1) above, is Saad's claim that HTK had terminated his employment before FINRA detected his misconduct mitigating?

(3) Is Saad's claim that he was under personal and professional stress at the time of his misconduct mitigating?

(4) Are there any other considerations that Saad has raised (whether or not discussed in the D.C. Circuit's decision) that are mitigating?

(5) In light of FINRA's findings as to questions (1) through (4) above, what is an appropriate sanction in this case?

Page 2 of the SEC Order of Remand

FINRA Mulligan

As should have been expected (at least I expected it), the March 16, 2015, NAC Decision in response to the SEC's remand pretty much re-states the self regulator's earlier positions, findings, and rationale. FINRA Department of Enforcement, Complainant, v. John M. E. Saad, Respondent (NAC Decision No. 2006006705601, On Remand From SEC / March 16, 2015). Quoted below are extracts of what I deemed FINRA's pertinent responses to the SEC's questions (the number beginning each extract corresponds to the same enumerated SEC question):
  1. [This] part of Principal Consideration Number 14 is relevant only to the sanctions imposed on an individual respondent, and not a member firm . . .

  2. [I]ndeed, there are good reasons for not crediting a firm's decision to terminate a respondent with mitigation. First, being fired for engaging in misconduct is usually an inherent result of the misconduct itself. See Brokaw, 2013 SEC LEXIS 3583, at *71 (stating that loss of employment and other "hardships" were not mitigating because "they are all a direct result of his deliberate misconduct"); Jason A. Craig, Exchange Act Release No. 59137, 2008 SEC LEXIS 2844, at *27 (Dec. 22, 2008) (rejecting argument that "loss of work" was mitigating because any "economic disadvantages" suffered were "a result of his misconduct"). Moreover, a firm's termination of an individual does not disqualify an individual from working elsewhere, as demonstrated by Saad's ability to quickly join another company that did not require him to have a securities registration. Therefore, the fact that HTK terminated Saad before FINRA detected the misconduct is not mitigating. . . .

  3. [W]e are sympathetic to the personal and job-related stress that Saad faced in 2006, and understand how his concerns over losing his job may have motivated him to hide his lack of business-related travel through the submission of a falsified expense report. Nevertheless, there is no evidence that his stress interfered with his ability to comply with FINRA rules or his understanding of what those rules required in terms of ethical conduct. Saad's conduct did not involve a momentary, stress-caused lapse in, or interference with, his judgment. Instead, t involved several separate decisions that were, as we said in our first decision, "premeditated, intentional and ongoing."
    . . .
    [I]n short, this was not a situation where a stressful situation or period caused a person to be momentarily distracted from his compliance obligations or unable to fulfill or understand the substance of those obligations. Rather, Saad, in response to a stressful personal situation,voluntarily chose and then methodically continued an unethical course of conduct and, thus, did not react to his stress in a manner appropriate for a person registered with FINRA. Saad's willingness to provide false documents to, and misappropriate funds from, his employer gives no assurance that Saad would choose to act in an ethical manner were he to again face a stressful situation related to his job or family, which could recur at any time. Saad's personal stress thus warrants no mitigation under the Guidelines.

  4. Saad has argued that he has a clean disciplinary history.19 While the existence of a disciplinary history is an aggravating factor when determining appropriate sanctions, its absence is not mitigating. . .
    Similarly, Saad has argued that there have been no additional complaints filed against him and, likewise, that "[t]ime and actual reality have shown that there is no serious risk of recidivism." The absence of customer complaints, however, is not mitigating. . .
    As for his claims of remorse, Saad points to no place in the record where he expressed remorse. Moreover, his claims of remorse and of having accepted responsibility are at odds with his numerous efforts to  inimize his transgressions and-despite his claims otherwise-blame others. . .
    Finally, Saad's contention that he provided substantial assistance to FINRA in its examination of this matter is belied by the record.27 Saad attempted to mislead FINRA and state investigators and also conceal the extent of his misconduct from them. In sum, the record contains no mitigating factors. , ,

  5. [I]n sum, we have looked at the record anew and considered all of the parties' sanctions related arguments, including those concerning potential mitigating and aggravating factors. We find that Saad's conduct was egregious and find no acceptable mitigation. His choices reflect a troubling willingness to engage in unethical misconduct involving dishonesty and the misappropriation of firm assets through the use of false expense reports. Saad's remaining in the industry, which relies so heavily on personal integrity in matters both great and small, poses serious risks to the investing public. A bar is not only within the range of sanctions recommended in the Guidelines, it is an appropriate remedial sanction that will protect the public from future harm at his hands and deter others in the industry from engaging in similar misconduct. Therefore, after further consideration of the sanctions, we reaffirm our decision to bar Saad in all capacities for his misconduct.
The Mobius Strip of Regulation

You did catch the fact that this nearly 8-year odyssey involved  $1,144.63 in wrongful disbursement -- sure, even I am convinced that Saad engaged in misconduct by submitting the invoices and accepting the payments. Nonetheless, like I said, we're dealing with what's largely chump change on Wall Street. No . . . that doesn't make Saad's actions right and it doesn't mean that he should not have been fired and that FINRA should not have charged and/or barred him. Howsabout you simply file my observation under the "just sayin'."

Also, anyone have any idea as to what the hell went on from the SEC's October 2013 remand to FINRA and FINRA's March 2015 Decision in response to that remand? That's about a year and a half. Just sayin'.

You also understand that if Saad chooses, he will be able to appeal FINRA's 2015 affirmation of its 2008 OHO Decision and 2009 NAC Decision. Saad could then go back to the SEC and, thereafter, find himself back before the Circuit Court. Why, we could be discussing Saad's ensuing appeals for another five years! You ever wonder what it cost FINRA, the SEC, and the federal courts to deal with this $1,144.63 business expense matter? Again ... just sayin'.

In any event, though, ain't it grand? Ain't it amazing? Some nine years after Saad alleged misconduct, we have made a full circumnavigation (or, perhaps, circumvention?) of the Wall Street regulatory circle from FINRA to the SEC to the Circuit Court to the SEC and back to FINRA.Notwithstanding all the going to and fro, we literally find ourselves where we started -- back at FINRA and with not much to show for the trip. We end where we started; or we now start where we had ended. All of which reminds me of a Mobius Strip. What it doesn't remind me of is effective regulation. Just sayin'.


FINRA Department of Enforcement, Complainant, v. John M. E. Saad, Respondent (NAC Decision No. 2006006705601, On Remand From SEC / March 16, 2015)

In the Matter of the Application of John M. E. Saad For Review of Disciplinary Action Taken by FINRA (SEC Order Remanding to FINRA, Securities and Exchange Commission, '34 Act Rel. No. 70632; Admin. Proc. File No. 3-13678 / October 8, 2013)

John M.E. Saad, Petitioner, v. Securities and Exchange Commission, Respondent (D.C. Circuit Opinion, No. 10-1195, June 11, 2013),

In the Matter of the Application of John M. E. Saad For Review of Disciplinary Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 62178; Admin. Proc. File No. 3-13678 / May 26, 2010)