Saad v. Sec. & Exch. Comm'n

• Citation: 873 F.3d 297
• Decision Date: 13 October 2017
• Docket Number: No. 15-1430.,15-1430.
• Parties: John M.E. SAAD, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

873 F.3d 297

John M.E. SAAD, Petitioner

v.SECURITIES AND EXCHANGE COMMISSION, Respondent

No. 15-1430.

United States Court of Appeals, District of Columbia Circuit.

Argued March 16, 2017

Decided October 13, 2017

Sara E. Kropf, Washington, DC, argued the cause for petitioner. With her on the briefs was Steven Nathan Berk.

Dina B. Mishra, Attorney, U.S. Securities and Exchange Commission, argued the cause for respondent. On the brief were Anne K. Small, General Counsel at the time the brief was filed, Sanket J. Bulsara, Deputy General Counsel at the time the brief was filed, John W. Avery, Deputy Solicitor, and Christopher Paik, Special Counsel.

Before: Garland, Chief Judge, and Kavanaugh and Millett, Circuit Judges.

Concurring opinion filed by Circuit Judge Kavanaugh.

Dubitante opinion filed by Circuit Judge Millett with respect to Section II.B of the opinion.

Millett, Circuit Judge:

John M.E. Saad, a broker-dealer, unlawfully misappropriated his employer's funds on two separate occasions, and then spent the next seven months misleading investigators in an effort to cover up his wrongdoing. After a lengthy review process, the Securities and Exchange Commission sustained a decision of the Financial Industry Regulatory Authority ("FINRA") permanently barring Saad from membership and from working with any of its affiliated members. Saad challenges the Commission's decision as insufficiently attentive to mitigating factors and argues that the permanent bar is impermissibly punitive rather than remedial. We hold that the Commission reasonably grounded its decision in the record, which extensively evidenced Saad's acts of misappropriation, his prolonged efforts to cover his tracks through falsehoods, and his repeated and deliberate obstruction of investigators. With respect to the permanent bar on Saad's registration with FINRA and affiliation with its members, the court remands for the Commission to determine in the first instance whether Kokesh v. SEC , ––– U.S. ––––, 137 S.Ct. 1635, 198 L.Ed.2d 86 (2017), has any bearing on Saad's case. Accordingly, Saad's petition for review is denied in part and remanded to the Commission in part.

I

A

FINRA is a private self-regulatory organization that oversees the securities industry, including broker-dealers. Saad v. SEC , 718 F.3d 904, 907 (D.C. Cir. 2013) ; see Public Investors Arbitration Bar Ass'n v. SEC , 771 F.3d 1, 2 (D.C. Cir. 2014). As part of its industry oversight, FINRA sets professional rules of conduct for its members. See Saad , 718 F.3d at 907 ; see also 15 U.S.C. § 78o–3(b)(2). One such rule—FINRA Rule 2010—requires "[a] member, in the conduct of its business, [to] observe high standards of commercial honor and just and equitable principles of trade." FINANCIAL INDUSTRY REGULATORY AUTHORITY, FINRA MANUAL, FINRA RULES , Rule 2010.¹ The high ethical standards enforced by Rule 2010 are vital because "customers and firms must be able to trust securities professionals with their money." J.A. 111–112. Trustworthiness and integrity thus are essential to the functioning of the securities industry.

FINRA has developed "Sanction Guidelines," which elaborate upon the contours of its rules of conduct. As relevant here, the Guidelines provide that conversion and the improper use of funds or securities will violate Rule 2010. J.A. 93. Conversion is defined as "an intentional and unauthorized taking of and/or exercise of ownership over property by one who neither owns the property nor is entitled to possess it." Id . In cases of conversion, the Sanction Guidelines provide that "a [lifetime] bar is standard," "regardless of [the] amount converted." Id .

In determining the appropriate sanction to be imposed for a violation of its rules, FINRA's Guidelines outline eight factors to be considered: (i) the need for the sanction to be remedial, to deter future misconduct, and to improve business standards in the securities industry, (ii) the violator's status as a repeat or one-time violator, (iii) the appropriateness of the sanction for the specific misconduct, (iv) the need in a particular case either to aggregate or to sanction individually similar violations, (v) the appropriateness of restitution or rescission, (vi) the remediation needed to ensure the individual does not benefit from ill-gotten gains, (vii) the necessity of requalification before permitting continued participation in the securities industry, and (viii) the violator's ability to pay any fine or restitution. J.A. 87–90.

In addition to those general principles, FINRA adjudicators must consider any other mitigating or aggravating factors. J.A. 91. FINRA's Sanction Guidelines provide a non-exhaustive list of nineteen potential aggravating or mitigating factors, including whether the violator (i) accepts responsibility for the misconduct, (ii) took voluntary corrective action prior to detection, (iii) engaged in a pattern of misconduct, (iv) perpetrated the misconduct over an extended period of time, (v) attempted to conceal the misconduct, (vi) acted intentionally, or (vii) was already disciplined by the FINRA member firm. J.A. 91–92.

The disciplinary process begins when FINRA's Department of Enforcement or Department of Market Regulation files a complaint with the FINRA Office of Hearing Officers. FINRA Rule 9211. A panel of hearing officers then conducts a disciplinary proceeding, FINRA Rule 9213, and issues a final written decision addressing both liability and remedial sanctions, FINRA Rule 9268.

Either FINRA or the violator may appeal to the National Adjudicatory Council, FINRA Rule 9311, which "may affirm, modify, reverse, increase, or reduce any sanction, or impose any other fitting sanction," FINRA Rule 9349(a). The Council then provides a proposed decision to the FINRA Board. FINRA Rule 9349(c). If no Board member calls for review of the Council's decision, it becomes final. Id.

The violator may then seek review of FINRA's decision by the Securities and Exchange Commission, FINRA Rule 9370, which superintends the disciplinary decisions of financial industry self-regulatory organizations like FINRA, 15 U.S.C. § 78s(d) – (e). The Commission conducts its own review of the disciplinary action, and may modify, affirm, or set aside the sanction. Id. § 78s(e)(1)(A)–(B). The Commission will set a remedial order aside if the order "imposes any burden on competition not necessary or appropriate" to further the purposes of the Securities Exchange Act, or if the sanction "is excessive or oppressive." Id. § 78s(e)(2).

B

John Saad was a regional director in the Atlanta Office of Penn Mutual Life Insurance Company, and was a FINRA-registered broker-dealer employed by Penn Mutual's affiliate Hornor, Townsend, & Kent, Inc. Saad , 718 F.3d at 906. Hornor, Townsend, & Kent, Inc. is a FINRA member firm. Id.

In July 2006, Saad scheduled a business trip from Atlanta, Georgia, to Memphis, Tennessee, but the trip was canceled at the last minute. Saad , 718 F.3d at 908 ; see also J.A. 107. Instead of going home to his wife and infant twins, Saad checked into an Atlanta hotel for two days. Saad , 718 F.3d at 908. Upon returning to his office, Saad submitted a false expense report for air travel to Memphis and a two-night stay in a Memphis hotel. Id. Attached to that false expense report were forged receipts for the fictitious airfare and hotel. Id.

Unconnected to the fabricated Memphis trip, Saad submitted another false expense report to his firm for a replacement cellphone. Saad , 718 F.3d at 908. Contrary to his representation in the expense report, Saad did not replace his own cellphone but instead purchased the cellphone for a female insurance agent at another firm. Id. ; see also J.A. 62.

Saad's misconduct was soon discovered by an administrator in the Atlanta office of his firm because Saad submitted for reimbursement a receipt for four drinks purchased at an Atlanta hotel lounge on the same date that he was supposedly in Memphis. Saad , 718 F.3d at 908. When the administrator confronted him with the receipt, Saad grabbed the receipt and threw it away. Id. The administrator retrieved the receipt and sent it to Penn Mutual's home office. Id. In September 2006, Saad's employment was terminated. Id.

After Saad's termination, investigators from the National Association of Securities Dealers ("NASD")—FINRA's predecessor—questioned him about the false expense reports. Saad , 718 F.3d at 908. In a November 2006 email, Saad falsely told investigators that the fabricated trip report was "for a business trip that had yet to occur[.]" Id. Five months later, in April 2007, Saad falsely stated to investigators that he did not know the person for whom he had purchased the cellphone. Id. The next month, Saad untruthfully told examiners that he could not remember if he had purchased a plane ticket for the fabricated Memphis trip. Id.

In September 2007, FINRA brought a disciplinary proceeding against Saad alleging "Conversion of Funds" in violation of FINRA Rule 2010. Saad , 718 F.3d at 908.² The hearing panel found that Saad had violated Rule 2010. Saad, in his own defense, explained that he had been experiencing significant personal and professional stress at the time he submitted the false expense reports because his sales had declined and one of Saad's one-year old twins was suffering from a stomach disorder that required frequent hospitalizations. Id. The hearing panel imposed a bar that permanently forbade Saad from associating with any FINRA member firm in any capacity. Id. at 909.

Saad appealed, and the National Adjudicatory Council affirmed. Saad , 718 F.3d at 909. In reviewing the lifetime ban, the Council concluded that Saad's misconduct involved several aggravating factors, such as "the intentional and ongoing nature of Saad's misconduct, Saad's efforts to deceive [Hornor, Townsend, & Kent] and Penn Mutual, [and] Saad's initial instinct to conceal the extent of his actions from state and FINRA examiners." Id . at 909 (second alteration in original and...