D.C. Circuit Split Over Proper Penalty for Dishonest Broker

(CN) – A broker violated Financial Industry Regulatory Authority rules by fabricating business expenses, but the Securities and Exchange Commission must revisit whether a lifetime ban from the industry is an appropriate penalty, the D.C. Circuit ruled.

In 2006, John Saad was a registered broker-dealer working for Hornor, Townsend & Kent, an affiliate of Penn Mutual Life Insurance, when he fabricated receipts for a business trip that never took place.

The trip was supposed to take him from Atlanta to Memphis, but was canceled at the last minute. Instead of going home to his wife and 1-year-old twins, Saad checked into a hotel for two days, then submitted a false expense report for flights to Memphis and a stay at a Memphis hotel.

Unrelated to this trip, Saad also submitted a false expense report for a replacement cellphone, which he gave to a female insurance agent at another firm.

His conduct was quickly discovered, and Saad was fired. After his termination, investigators from the National Association of Securities Dealers – the predecessor to FINRA – questioned him, and he repeatedly lied about what happened.

On the completion of the investigation, a disciplinary panel permanently barred Saad from associating with any FINRA firm, and the SEC upheld the decision.

A three-judge panel of the D.C. Circuit upheld Saad’s disciplinary action on Oct. 13.

“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,” U.S. Circuit Judge Patricia Millett wrote for the panel.

Since the law provides that sanctions against Saad must be “remedial” not punitive, however, Millett remanded the case for the SEC to decide if the Supreme Court’s recent decision in Kokesh v. SEC has any bearing on the lifetime bar imposed on Saad.

In a concurrence, U.S. Circuit Judge Brett Kavanaugh said that Kokesh is applicable to this case, and that he would find the lifetime ban imposed on Saad excessive.

“After the Supreme Court’s decision in Kokesh, our precedents characterizing expulsions or suspensions as remedial are no longer good law,” Kavanaugh wrote.

But Millett wrote in her own concurrence that Kokesh only applies to the violation of public laws – whereas Saad stands accused of violating FINRA’s rules of professional conduct.

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