SEC Must Decide Whether Broker Bar Punitive, Remedial

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By Phyllis Diamond

A stockbroker who was barred from FINRA membership for falsifying expense reports may try to persuade the SEC that the sanction is punitive--not remedial--for purposes of a time limit on penalty actions, a federal appeals court said Oct. 13.

The Securities and Exchange Commission must address, “in the first instance, the relevance--if any, of the” U.S. Supreme Court’s recent Kokesh decision, the U.S. Court of Appeals for the D.C. Circuit said. ( Saad v. SEC , 2017 BL 367234, D.C. Cir., No. 17-1430, 10/13/17 ).

In Kokesh v. SEC, the justices concluded earlier this year that the commission was bound by a five-year statute of limitations for punitive actions when it sought disgorgement from a New Mexico man who misappropriated money from investment companies he controlled.

“We are still evaluating the Kokesh ruling and its effect on this case, but are extremely gratified to have the opportunity to go back to the SEC and explain again why its penalty was much too severe in this matter,” Washington lawyer Sara Kropf, counsel to ex-broker John Saad, told Bloomberg Law. The SEC didn’t respond to a request for comment.

Lifetime Bar

In 2007, FINRA contended that Saad, a regional director of Penn Mutual Life Insurance Co.'s Atlanta office who was registered with the firm’s broker-dealer affiliate, violated the self-regulatory organization’s rules by submitting false expense reports for nonexistent business travel and to buy a cell phone for a female agent at another insurance company.

FINRA sanctioned Saad with a lifetime bar, and the SEC affirmed. It found the industry bar to be remedial, not punitive, and necessary to protect FINRA members, their customers, and other securities industry participants.

Saad appealed to the D.C. Circuit, which denied his bid for review in part. Judge Patricia Millett said the commission properly considered any mitigating evidence, as well as Saad’s lengthy pattern of misconduct, and the threat his conduct posed to market participants’ faith in the integrity of the industry.

However, the court said, the SEC must decide whether the high court’s Kokesh decision has any bearing on the controversy.

In a separate concurring opinion, Judge Brett Kavanaugh said the court correctly remanded the case to the SEC. He said that post- Kokesh, “we can no longer characterize an expulsion or suspension as remedial.”

In a separate dubitante--with doubt--opinion, Millett said she had “grave doubts about the propriety of remanding the case” to the commission for what would be the second time. She said that in her view, the agency “amply explained the remedial reasons for sustaining FINRA’s permanent bar on Saad’s affiliation with it and its members, and there is nothing in Kokesh that helps Saad.”

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To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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