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Barred Broker Files Lawsuit Challenging FINRA’s Ability to Bar Brokers

In a lawsuit filed with the U.S. Court of Appeals for the District of Columbia Circuit, a permanently barred broker is challenging the Financial Industry Regulatory Authority's ability to impose such sanctions against securities professionals.

In a lawsuit filed with the U.S. Court of Appeals for the District of Columbia Circuit, a permanently barred broker is again challenging the Financial Industry Regulatory Authority’s ability to impose such sanctions against securities professionals. The story was first reported by Investment News.

John M.E. Saad, formerly a regional director in the Atlanta office of Penn Mutual Life Insurance Co., was barred by FINRA in 2007 for misappropriating $1,144 from his then-employer by falsifying his expense accounts. At the time, Saad was registered with Penn Mutual’s broker-dealer affiliate, Hornor, Townsend, & Kent, Inc., a FINRA member firm.

According to the brief, in July 2006, Saad was scheduled to take a business trip to Memphis, but it was canceled at the last minute. He allegedly submitted forged receipts for air travel, a two-night hotel stay, and a cell phone that was purchased for another person. He was terminated after an administrator discovered that the receipts were falsified.

Saad claims that at the time of the alleged offence, he was suffering from severe personal and professional distress, due to the frequent hospitalization of his infant son and declining sales at work.

FINRA adheres to a policy of imposing lifetime bars to securities professionals who steal from their employers. But Saad argues that FINRA’s punishment, which was upheld by the SEC, was too harsh and went against the 2017 Supreme Court decision in Kokesh v. SEC.

Kokesh limits the SEC’s ability to recover ill-gotten gains since disgorgement is a “penalty” rather than a “remedy,” and is subject to a five-year statute of limitations.

In 2017, Saad’s case was heard by the D.C. Circuit Court of Appeals’ three-judge panel, which remanded to the SEC to consider whether its order was affected by Kokesh. The SEC upheld the lifetime bar as an appropriate “remedial” sanction, rather than a penalty, and concluded that the Kokesh decision cannot apply to FINRA bars.

However, in the latest appeal, Saad’s counsel argues that his lifetime bar is indeed punitive. “It would be odd to suggest that such a severe and disproportionate penalty — a lifetime ban for a misappropriation of a small sum nearly 15 years ago — should be viewed as ‘remedial.’ This court should reverse the SEC’s order.”

Prior to his appointment to the Supreme Court and while serving on the court’s three-judge panel in 2017, Brett Kavanaugh argued that it was correct to remand the case to the SEC. “Under any common understanding of the term ‘remedial,’ expulsion and suspension of a securities broker are not remedial,” said Kavanaugh. “Rather, expulsion and suspension are punitive.”

“If FINRA and the SEC must justify expulsions or suspensions as punitive (as I believe they must after Kokesh), they will have to explain why such penalties are appropriate under the facts of each case,” wrote Kavanaugh. “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 suspension serves the purposes of punishment and is not excessive or oppressive.”

Another judge on the panel, Patricia Millet, questioned whether remand to the SEC was proper and wrote “Saad’s repeated turpitudinous misconduct, his nearly year-long venture in misleading and lying to his employer and investigating regulators, and the paramount need for the utmost honesty and integrity in the handling of others’ property in the securities industry amply justified the [SEC’s] decision to sustain FINRA’s imposition of debarment as a remedy in this case.”

She added, “I do not see anything in Kokesh that bears on that decision by a private self-regulatory organization to disaffiliate with someone who repeatedly transgressed industry rules that are necessary to protect the investing public and the integrity of the securities industry.”

The third member of the panel, Judge Merrick Garland, joined the court’s 2017 opinion remanding the case but did not join either opinion.

The D.C. Circuit Court of Appeals has yet to set a hearing date.

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