This Case Could Mean An End To Bars And Suspensions…Maybe

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

Bear with me here as I relate the tale of John Saad and his tortuous path through the FINRA Enforcement process and, ultimately, the court system. It is worth following me on this journey, as the upshot of the story is that FINRA, which is so quick to want to bar every respondent it sees, may have to change its ways.

Mr. Saad was barred by FINRA for misappropriating his employer’s funds on two occasions. He accomplished this by submitting false expense reports. Mr. Saad appealed to the SEC, which affirmed FINRA’s decision. From there, he then appealed to the U.S. Circuit Court of Appeals for the D.C. Circuit, what has been characterized as the nation’s second highest court. The Circuit Court remanded the case back to the SEC because the Commission’s analysis of the FINRA decision “failed to address potentially mitigating factors, such as Saad’s termination by his employer and Saad’s personal and professional stress.” The Court “left open the question whether the lifetime bar was an ‘excessive or oppressive’ sanction, noting that the Commission had an obligation on remand to ensure that its sanction was remedial rather than punitive.”

The SEC, in turn, remanded the case back to FINRA, specifically to the NAC, to reconsider the imposition of a bar on Mr. Saad, particularly in light of certain claimed mitigating evidence that he cited, namely, the fact that he was disciplined – i.e., terminated – by his BD before the regulators detected the issue, and that he was under personal and professional stress, which may have led to his poor decisions.

The NAC concluded that while prior discipline by a BD “may be mitigating,” in this case, it was not. It also found that Mr. Saad’s stress levels were not mitigating, either. Accordingly, the NAC concluded, again, that he deserved to be barred, and the SEC agreed, concluding that the bar was “remedial, not punitive,” and “necessary to protect FINRA members, their customers, and other securities industry participant[s].”

Mr. Saad appealed, again to the Circuit Court, arguing that the SEC “failed to give his mitigating evidence sufficient heed.” The Court disagreed:

  • Getting fired by his BD for his misconduct “carried little weight” because Mr. Saad repeatedly lied to his BD about what he had done in an effort to mislead.
  • His claims of “stress” were uncompelling because his conduct “was not a momentary or impulsive action driven by stress, but instead involved ‘deceptive conduct demonstrate[ing] a high degree of intentionality over a long period of time.’”
  • It did not matter that Mr. Saad misappropriated firm funds, rather than customer funds, since the “threat [to the integrity of the securities industry] remains the same whether the victim is a trusting employer or trusting client.”
  • Mr. Saad’s otherwise clean disciplinary record was irrelevant, as “individuals in a profession that depends critically on public trust and honesty are already expected to have a clean record, so it is not something for which they get extra credit.”

But…and here, finally, is the point of this blog post…the Court remanded the case back to the SEC – again – to answer the question whether the permanent bar imposed on Mr. Saad was “impermissibly punitive” in light of the Supreme Court’s recent decision in Kokesh. As students of the industry are undoubtedly aware, in Kokesh, the Supreme Court ruled that disgorgement paid by a respondent to the Government as a sanction imposed by the SEC was a “penalty,” and therefore subject to a five-year statute of limitations, overturning a line of cases that had concluded that disgorgement was remedial and not punitive.

The Supreme Court’s reasoning was logical:

  • Disgorged money paid to the Government does not go to victims;
  • Disgorged money also is not limited to the amount of harm to victims;
  • Both of these would need to be true for the sanction to be “truly remedial rather than punitive.”

As the concurring opinion[1] pointed out, the courts’ “use of the term ‘remedial’ to describe expulsions or suspensions finds its roots in a single, unexplained sentence in a 77-year old Second Circuit case.” But that conclusion does not make sense in light of the bullet points above. As the court put it,

Like other punitive sanctions, expulsion and suspension may deter others from and will necessarily deter and prevent the wrongdoer from further wrongdoing. Expulsion and suspension may thereby protect the investing public. But expulsion and suspension do not provide a remedy to the victim. Under any common understanding of the term ‘remedial,’ expulsion and suspension of a securities broker are not remedial. Rather, expulsion and suspension are punitive. . . .  Like disgorgement paid to the Government, expulsion or suspension of a securities broker does not provide anything to the victims to make them whole or to remedy their losses. Therefore, in light of the Supreme Court’s analysis in Kokesh, expulsion or suspension of a securities broker is a penalty, not a remedy.

The concurring opinion was quick to point out that it did not mean “to suggest that FINRA lacks power to impose punitive sanctions such as expulsions or suspensions.” But, the unanswered question, the one that was remanded back to the SEC, “is whether the lifetime expulsion of Saad – what our prior opinion in this case called the ‘securities industry equivalent of capital punishment” . . . – was a permissible and appropriate penalty under the relevant statutes and regulations.”

What will this mean going forward? According to the concurring opinion, FINRA and the SEC

will have to explain why such penalties are appropriate under the facts of each case. FINRA and the SEC will no longer be able to simply wave the ‘remedial card’ and thereby evade meaningful judicial review of harsh sanctions they impose on specific defendants. Rather, FINRA and the SEC will have to reasonably explain in each individual case why an expulsion or a suspension serves the purposes of punishment and is not excessive or oppressive. Over time, a fairer, more equitable, and less arbitrary system of FINRA and SEC sanctions should ensue.

There is no guarantee that Mr. Saad’s case will change anything, but it is nice to dream of a world where FINRA and the SEC will actually have to justify suspending and barring people. A “fairer” and “more equitable” system, wow, sounds too good to be true.

[1] It is worth noting that in addition to the concurring opinion, one Judge authored a lengthy and thoughtful “dubitante” opinion, i.e., one that expresses “deep doubts” about the majority’s decision to remand the case back to the SEC. Even though it is not a true dissenting opinion, the Judge nevertheless went along with the majority.