Saad v. Sec. & Exch. Comm'n

• Decision Date: 11 June 2013
• Docket Number: No. 10–1195.,10–1195.
• Citation: 718 F.3d 904
• Parties: John M.E. SAAD, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

718 F.3d 904

John M.E. SAAD, Petitioner

v.SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 10–1195.

United States Court of Appeals,District of Columbia Circuit.

Argued Jan. 9, 2013.

Decided June 11, 2013.

On Petition for Review of an Order of the Securities & Exchange Commission.

Steven N. Berk argued the cause for petitioner. With him on the briefs was Matthew J. Bonness. Michael S. Gulland entered an appearance.

Christopher Paik, Special Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief were Michael A. Conley, Deputy General Counsel, and John W. Avery, Deputy Solicitor.

Before: HENDERSON and ROGERS, Circuit Judges, and EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

EDWARDS, Senior Circuit Judge:

This case involves a disciplinary action brought against John M.E. Saad by the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is the successor to the National Association of Securities Dealers (“NASD”). From January 2000 to October 2006, Saad was a regional director in the Atlanta, Georgia, office of Penn Mutual Life Insurance Company (“Penn Mutual”). He was also registered with Penn Mutual's broker-dealer affiliate, Hornor, Townsend & Kent, Inc. (“HTK”), which is a FINRA-member firm. In September 2007, FINRA filed a complaint with its Office of Hearing Officers charging that, in July 2006, Saad had violated FINRA rules by submitting false expense reports for reimbursement for nonexistent business travel and for a fraudulently purchased cellular telephone. After a hearing, the 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. This sanction was affirmed by FINRA's National Adjudicatory Counsel (“NAC”) and by the U.S. Securities and Exchange Commission (“SEC” or “Commission”).

In his petition for review to this court, Saad does not contest his culpability, but instead argues only that the SEC abused its discretion in upholding the lifetime bar. In reviewing a disciplinary sanction imposed by FINRA, the SEC must determine whether, with “due regard for the public interest and the protection of investors,” that sanction “is excessive or oppressive.” 15 U.S.C. § 78s(e)(2). As part of that review, the SEC must carefully consider whether there are any aggravating or mitigating factors that are relevant to the agency's determination of an appropriate sanction. See PAZ Sec., Inc. v. SEC, 494 F.3d 1059, 1065 (D.C.Cir.2007) (“PAZ I ”). This review is particularly important when the respondent faces a lifetime bar, which is “the securities industry equivalent of capital punishment.” Id.

Saad has consistently advanced a number of mitigating factors that he claims should militate against a lifetime bar. The SEC addressed several of these factors and chose not to credit them. However, the agency plainly ignored two important considerations: (1) the extreme personal and professional stress that Saad was under at the time of his transgressions; and (2) the fact that Saad's misconduct resulted in his termination before FINRA initiated disciplinary proceedings. The latter consideration is particularly significant because it is specifically listed in FINRA's Sanction Guidelines as a potential mitigating factor. Sanction Guidelines 7 (2011) available at http:// www. finra. org. In light of this record, we agree with Saad that the SEC abused its discretion in failing to adequately address all of the potentially mitigating factors that the agency should have considered when it determined the appropriate sanction. We take no position on the proper outcome of this case. That is for the SEC to consider in the first instance, after it has assessed all potentially mitigating factors that might militate against a lifetime bar. We therefore remand to the SEC for further consideration of its sanction in light of this opinion.

I. Background

A. Regulatory Overview

FINRA is an association of securities broker-dealers registered with the Commission pursuant to Section 15A(a) of the Securities Exchange Act of 1934. 15 U.S.C. § 78 o–3(a). It is a self-regulatory organization empowered to adopt rules governing the conduct of its members and of persons associated with its members, such as Saad. FINRA enforces compliance with the Securities Exchange Act, SEC regulations, and FINRA's own rules. See id. § 78o–3(b)(2). FINRA does so by bringing disciplinary proceedings to adjudicate violations, which are subject to review by the Commission. FINRA brought such a proceeding against Saad based on his conduct in 2006 and 2007.

During 2006 and much of 2007, Saad's activities as a securities dealer were subject to regulation by the NASD. However, by the time Saad's disciplinary proceeding was formally initiated in September 2007, the SEC had approved the consolidation of NASD with certain functions of the New York Stock Exchange to create a new self-regulatory organization: FINRA. Thus, while Saad's misconduct occurred prior to the creation of FINRA, FINRA's Department of Enforcement with the FINRA Office of Hearing Officers initiated proceedings against Saad.

Generally, the references to NASD and FINRA are interchangeable throughout this opinion. The charge against Saad was for a violation of NASD Conduct Rule 2110, which requires that members “observe high standards of commercial honor and just and equitable principles of trade.” See John M.E. Saad, S.E.C. Release No. 62178, 2010 WL 2111287, at *4 (May 26, 2010). NASD Conduct Rule 2110 is comparable to the current, superseding FINRA Conduct Rule 2010. See NASD to FINRA Conversion Chart Spreadsheet,available at http:// www. finra. org. In sanctioning Saad, FINRA and the SEC applied the FINRA Sanction Guidelines, as opposed to the predecessor NASD Sanction Guidelines. SeeSaad, 2010 WL 2111287, at *4.

B. Facts

The facts in this case are undisputed. Br. of Pet'r at 17. At the relevant time, Saad was employed by Penn Mutual and registered with its broker-dealer affiliate HTK, a FINRA-member firm. Saad was registered as an investment company products and variable contracts limited representative, a general securities representative, and a general securities principal.

This case centers on Saad's submission of several false expense claims to his employer and Saad's subsequent attempts to conceal his misconduct. 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. He later submitted to his employer a false expense report claiming expenses for air travel to Memphis and a two-day hotel stay in that city. Saad forged an airline travel receipt and a Memphis hotel receipt and attached those receipts to his expense report. Saad also submitted another false expense claim, unrelated to the fictional Memphis trip. He claimed an expense 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. Saad testified at the disciplinary hearing that his employer probably would not have approved his purchase of a cell phone if he had submitted an accurate expense claim. See Saad, 2010 WL 2111287, at *2.

At his disciplinary hearing, Saad also explained that this conduct occurred during a period when he was under a great deal of professional and personal stress. Toward the end of 2005, Saad's sales declined and he virtually halted business travel, which was considered a significant aspect of his professional responsibilities. In June 2006, Saad's superiors at Penn Mutual issued a production warning to him and admonished him to increase his sales of Penn Mutual products. During this same time period, 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.

Saad's false travel expense report was discovered by the Atlanta office administrator, who noticed that Saad had attached to the report an unaltered receipt for four drinks purchased at an Atlanta hotel lounge on the same day when, according to the expense report, Saad was supposed to be in Memphis. When the office administrator questioned him about the receipt for the drinks, Saad withdrew the receipt and threw it away. The office administrator retrieved the receipt from the trash and submitted it to Penn Mutual's home office, thus alerting Saad's employer to the falsity of the travel expense report. In September 2006, Saad was discharged by both Penn Mutual and HTK for his misdeeds.

C. Proceedings Below

Approximately two months after Saad was terminated, NASD investigators questioned him about the reasons for his discharge and his false expense reports. During this investigation, Saad repeatedly attempted to mislead NASD by providing investigators with false information. In a November 2006 email, Saad told NASD that the expenses claimed on the fabricated trip report were “for a business trip that had yet to occur,” although in fact the expenses were for a trip that had been cancelled and had not been rescheduled. Saad, 2010 WL 2111287, at *3. In April 2007, Saad misrepresented to a FINRA examiner that he did not know the person for whom he had purchased a cell phone. Id. And in testimony delivered in May 2007, Saad contended that he could not recall whether he had purchased a plane ticket for the July 2006 trip to Memphis. John M. Saad, Compl. No. 2006006705601, 9 (NAC Oct. 6, 2009) (“NAC Decision”), reprinted in Deferred Joint Appendix (“D.A.”) 206, 214.

FINRA brought a disciplinary proceeding against Saad in September 2007, alleging “Conversion of Funds” in violation of NASD Conduct Rule 2110. A disciplinary hearing before a FINRA Hearing Panel was held in April 2008. The Hearing...