A unanimous panel concluded that a sanction can be remedial even if it seeks to protect the public rather than correct the effects of wrongdoing.
A unanimous D.C. Circuit panel upheld a Commission decision that the Supreme Court’s Kokesh opinion regarding disgorgement limits does not apply to a professional bar imposed as a sanction on John M.E. Saad for the violation of FINRA’s standards of professional conduct. The panel opinion relied heavily on circuit precedent and declined to venture into issues that the Supreme Court might eventually consider regarding the application of Kokesh and its progeny in the D.C. Circuit. By way of background, Kokesh held that SEC disgorgement is a penalty for purposes of the limitation period contained in 28 U.S.C. § 2462 but limited that decision to the context of the limitations period. As a result, the panel denied Saad’s petition for review (Saad v. SEC, November 6, 2020, Tatel, D.).
Sick child, future Supreme Court justices. Saad was terminated from his job as a broker-dealer in Atlanta for Penn Mutual Life Insurance Company’s affiliate Hornor, Townsend, & Kent, Inc. Saad was accused of misappropriating his employer’s funds by falsifying expense reports for a Memphis business trip he never took. Instead, Saad stayed at an Atlanta hotel for several days and racked up expenses that included a drinks bill, the receipt for which he later tried to throw away while being questioned by his employer’s administrator. Saad also used his employer’s funds to buy a cell phone for a female acquaintance. Saad blamed these departures from his previously clean record on high stress levels arising from both his job and a sick child.
The prior D.C. Circuit opinion, which remanded the case to the Commission, included a concurring opinion by then-Judge Kavanaugh (now Supreme Court justice), who posited that expulsions and suspensions are punitive instead of remedial. The Saad panel concluded that the SEC properly considered mitigating evidence but remanded the lifetime bar question to the Commission for additional consideration in light of Kokesh. Judge Kavanaugh’s concurrence explained that he understood Kokesh to mean that courts may not continue to call expulsions or suspensions remedial instead of punitive. He analogized the payment of disgorgement to the government to expulsions and suspensions because they too result in nothing being paid directly to victims (the Supreme Court in Kokesh noted that one reason for its holding was that disgorgement did not always get paid to victims but instead was paid to the government, one hallmark of a penalty).
By contrast, Judge Millett, who wrote for the prior Saad panel, also said in a separate dubitante opinion that Saad could only advance his late Kokesh argument (she traced Saad’s effort to a lone citation in his reply brief that she said was bereft of context) if he now claims that "penalty" in 28 U.S.C. § 2462 applies to the Commission’s "excessive or oppressive" standard and deprives the Commission of discretion to review FINRA disciplinary matters. Judge Millett also noted that other circuits, notably the Eighth (Collyard) and Tenth (ACAP Financial, Inc.—an opinion by then-Judge Gorsuch who is now a Supreme Court justice), supported the D.C. Circuit’s law on occupational debarment.
Kokesh inapplicable. In the latest Saad opinion, the panel addressed the question of whether Kokesh has any bearing on a FINRA professional membership and associational bar. The SEC generally can set aside a FINRA sanction if the sanction is excessive or oppressive. D.C. Circuit cases state that a sanction also must have due regard for the public interest and the protection of investors and that it must not be excessive or oppressive in that it must be for remedial instead of punitive purposes.
With respect to Kokesh, the panel distinguished the Supreme Court’s opinion from Saad’s case. For one, Saad’s case dealt with an industry professional standard whereas Kokesh dealt with a public law. Moreover, Kokesh involved disgorgement, relied on a different statute, and involved a different type of proceeding.
Although the panel acknowledged that Kokesh had left open several key questions, some of which have since been addressed by the Supreme Court (see, e.g., Liu v. SEC regarding disgorgement as equitable relief in civil enforcement actions), the panel rejected Saad’s argument that the panel should mull questions that might one day come before the Supreme Court as insufficient reason to upset circuit precedents that favor upholding FINRA’s sanction.
At oral argument, Saad’s counsel had urged the court to re-work circuit precedent to conform to the language used by the Supreme Court in Kokesh—specifically, the public wrong and punitive/deterrence language—because the SEC and FINRA had invoked deterrence in setting Saad’s bar and Kokesh should apply to the excessive and oppressive standard for setting aside a FINRA sanction. Judge Tatel, who would later write for the panel, had asked why the D.C. Circuit should abandon its precedents distinguishing 28 U.S.C. § 2462 from other types of cases when the Supreme Court expressly limited the reach of Kokesh. The SEC had argued that Kokesh did not re-write D.C. Circuit precedent.
The case is No. 19-1214.
Attorneys: Sarah Levine (Jones Day) for John M.E. Saad. Dina B. Mishra, Senior Counsel, SEC, for the SEC.
MainStory: TopStory BrokerDealers Enforcement FedTracker Securities DistrictofColumbiaNews
Interested in submitting an article?
Submit your information to us today!Learn More
Securities Regulation Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.