John Saad v. SEC ( 2020 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 24, 2020 Decided November 6, 2020
No. 19-1214
JOHN M.E. SAAD,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT
On Petition for Review of an Order
of the Securities and Exchange Commission
Sarah Levine argued the cause for petitioner. With her on
the briefs was Alex Potapov.
Dina B. Mishra, Senior Counsel, Securities and Exchange
Commission, argued the cause for respondent. With her on the
brief was John W. Avery, Deputy Solicitor. Michael A. Conley,
Solicitor, entered an appearance.
Before: TATEL, PILLARD, and WILKINS, Circuit Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: John M.E. Saad, a broker-dealer,
twice misappropriated his employer’s funds. Following Saad’s
unsuccessful efforts to cover his tracks by falsifying an expense
report, forging receipts, and misleading investigators, the
Financial Industry Regulatory Authority (FINRA) permanently
2
barred him from membership and from associating with any
FINRA member firm. The question presented here—the same
question we previously remanded for the Securities and
Exchange Commission to consider—is whether the Supreme
Court’s recent decision in Kokesh v. SEC, 137 S. Ct. 1635
(2017), “has any bearing on Saad’s case.” Saad v. SEC (Saad
II), 873 F.3d 297, 299 (D.C. Cir. 2017). The Commission
concluded that it does not, and we agree.
I.
“FINRA is a private self-regulatory organization that
oversees the securities industry, including broker-dealers.” Id.
“As part of its industry oversight, FINRA sets professional
rules of conduct for its members.” Id. FINRA Rule 2010
requires a “member, in the conduct of its business, [to] observe
high standards of commercial honor and just and equitable
principles of trade.” FINRA’s “Sanction Guidelines” provide
that “conversion and the improper use of funds or securities”
violate Rule 2010. Saad II, 873 F.3d at 299. FINRA’s
Guidelines set forth eight specific factors for determining the
appropriate sanction for a violation of its rules and instruct
adjudicators to consider any other mitigating or aggravating
factors. Id.
Once a sanction becomes final following FINRA’s internal
disciplinary process, a violator may seek review by the
Securities and Exchange Commission. Id. at 300 (citing FINRA
Rule 9370; 15 U.S.C. § 78s(d)–(e)). The Commission may set
a sanction aside if it “‘imposes any burden on competition not
necessary or appropriate’ to further the purposes of the
Securities Exchange Act, or if the sanction ‘is excessive or
oppressive.’” Id. (quoting 15 U.S.C. § 78s(e)(2)). The
Exchange Act directs the Commission to give “due regard [to]
the public interest and the protection of investors.” 15 U.S.C.
§ 78s(e)(2). Our court has characterized those provisions as
imposing, among other things, a “statutory requirement[] that a
sanction be remedial,” rather than a form of punishment. PAZ
3
Securities, Inc. v. SEC, 566 F.3d 1172, 1176 (D.C. Cir. 2009);
see also Siegel v. SEC, 592 F.3d 147, 157 (D.C. Cir. 2010) (“As
an initial matter, it is important to remember that the agency
‘may impose sanctions for a remedial purpose, but not for
punishment.’” (quoting McCurdy v. SEC, 396 F.3d 1258, 1264
(D.C. Cir. 2005))).
Petitioner Saad worked as a regional director in Penn
Mutual Life Insurance Company’s Atlanta office and was a
FINRA-registered broker-dealer employed by Penn Mutual’s
affiliate Hornor, Townsend & Kent, Inc., a FINRA member
firm. In July 2006, Saad scheduled a business trip from Atlanta
to Memphis, but the trip was canceled at the last minute. He
instead checked into an Atlanta hotel for two days and then
submitted a false expense report to his employer for air travel
to Memphis and a two-night stay in a Memphis hotel. He
attached to his report forged receipts for the fictitious airfare
and hotel stay. Unrelated to the fabricated Memphis trip, Saad
sought reimbursement for a replacement cellphone. Contrary to
his representation in the reimbursement request, he purchased
that cellphone not for himself, but rather for an insurance agent
at another firm.
An office administrator soon discovered Saad’s
misconduct when Saad submitted for reimbursement a receipt
for four drinks purchased at an Atlanta hotel lounge on a day
when he had supposedly been in Memphis. The administrator
confronted Saad with the receipt, who took it back and threw it
away. The administrator retrieved the receipt and sent it to Penn
Mutual’s home office. Penn Mutual then fired Saad.
FINRA’s predecessor, the National Association of
Securities Dealers (NASD), then investigated Saad. During that
investigation, Saad repeatedly lied about his actions. In
September 2007, FINRA brought a disciplinary proceeding
against Saad for “conversion of funds” in violation of NASD
Rule 2110 (now FINRA Rule 2010). The hearing panel found
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that Saad had violated the rule and imposed a bar permanently
forbidding him from associating with any FINRA member firm
in any capacity.
The Commission sustained Saad’s bar, concluding that
FINRA’s sanction was not “excessive or oppressive.” Our court
then granted in part Saad’s petition for review and remanded
for the Commission to consider certain potentially mitigating
factors, such as Saad’s termination and his personal and
professional stress. Saad v. SEC (Saad I), 718 F.3d 904, 913–
14 (D.C. Cir. 2013).
The Commission then returned the case to FINRA, which
considered the mitigating factors and concluded that a
permanent bar remained appropriate. The Commission again
sustained the bar, and Saad again sought review here. Although
concluding that the Commission “reasonably balanced the
relevant mitigating and aggravating factors before determining
that the gravity of Saad’s behavior warranted remedial action,”
we nonetheless remanded for “the Commission to address, in
the first instance, the relevance—if any—of the Supreme
Court’s recent decision in Kokesh” to the question whether
Saad’s bar was “impermissibly punitive.” Saad II, 873 F.3d at
302–04. Judge Millett and then-Judge Kavanaugh each wrote
separately to convey their differing views on that subject. On
remand, the Commission concluded that Kokesh did not alter
the propriety of Saad’s bar, and this petition followed.
II.
Before examining the extent of Kokesh’s impact in the
Exchange Act context, we must first explain how this court has
interpreted that Act’s standard for reviewing FINRA sanctions.
The Exchange Act provides that the Commission may set aside
a sanction that is “excessive or oppressive.” 15 U.S.C.
§ 78s(e)(2). We have generally read the statute as imposing two
related requirements on FINRA’s selection of appropriate
relief: that it do so with “due regard for the public interest and
5
the protection of investors,” 15 U.S.C. § 78s(e)(2), and that it
avoid “excessive or oppressive” sanctions, id., by acting “for a
remedial purpose, [and] not for punishment.” Siegel, 592 F.3d
at 157 (internal quotation marks omitted); see also PAZ, 566
F.3d at 1176 (“We require the Commission to explain its
reasoning in order to ensure it reviewed the sanction with ‘due
regard for the public interest and the protection of investors.’
15 U.S.C. § 78s(e)(2). We do not limit the discretion of the
Commission to choose an appropriate sanction so long as its
choice meets the statutory requirements that a sanction be
remedial and not ‘excessive or oppressive.’ Id.”).
On to Kokesh. There, the Supreme Court considered
whether disgorgement imposed as a sanction for violating
federal securities law is a “penalty” subject to 28 U.S.C.
§ 2462’s five-year limitations period for an “action, suit or
proceeding for the enforcement of any civil fine, penalty, or
forfeiture.” Kokesh, 137 S. Ct. at 1639 (internal quotation
marks omitted). The Court defined a “penalty” as a
“‘punishment, whether corporal or pecuniary, imposed and
enforced by the State, for a crime or offen[s]e against its laws.’”
Id. at 1642 (alteration in original) (quoting Huntington v.
Attrill, 146 U.S. 657, 667 (1892)). From that definition it
derived two principles. “First, whether a sanction represents a
penalty turns in part on whether the wrong sought to be
redressed is a wrong to the public, or a wrong to the
individual. . . . Second, a pecuniary sanction operates as a
penalty only if it is sought for the purpose of punishment, and
to deter others from offending in like manner—as opposed to
compensating a victim for his loss.” Id. (internal quotation
marks omitted). Applying those principles, the Court concluded
that “SEC disgorgement constitutes a penalty within the
meaning of § 2462.” Id. at 1643.
The Court gave three reasons for its conclusion. “First,
SEC disgorgement is imposed by the courts as a consequence
for violating . . . public laws”—that is, the wrong is one
6
“against the United States rather than an aggrieved individual.”
Id. “Second, SEC disgorgement is imposed for punitive
purposes.” Id. Disgorgement’s primary purpose, the Court
explained, is to deter violations of the securities laws, and
deterrence is a punitive objective. Id. Third, “in many cases,
SEC disgorgement is not compensatory,” given that disgorged
profits may be dispersed in part to the United States Treasury
rather than solely to victims of the violator’s wrongdoing. Id. at
1644. Summarizing, the Court observed that disgorgement
“bears all the hallmarks of a penalty: It is imposed as a
consequence of violating a public law and it is intended to deter,
not to compensate.” Id. The Court rejected the Commission’s
argument that disgorgement was “remedial” rather than a
“penalty,” stressing that disgorgement “cannot fairly be said
solely to serve a remedial purpose.” Id. at 1645 (internal
quotation marks omitted).
Importantly, the Court also limited its holding’s reach with
a disclaimer: “Nothing in this opinion should be interpreted as
an opinion on whether courts possess authority to order
disgorgement in SEC enforcement proceedings or on whether
courts have properly applied disgorgement principles in this
context[.] The sole question presented in this case is whether
disgorgement, as applied in SEC enforcement actions, is
subject to § 2462’s limitations period.” Id. at 1642 n.3.
Saad argues that Kokesh sets forth new, general principles
for distinguishing “punitive” and “remedial” sanctions, and that
it accordingly governs section 78s(e)(2)’s “excessive or
oppressive” standard. Because we agree with the Commission
that Kokesh does not reach that far, our discussion begins and
ends with that dispute.
This is not our first opportunity to address how far the
principles governing section 2462’s “penalty” inquiry extend
beyond the statute of limitations context. In Johnson v. SEC, 87
F.3d 484, 491–92 (D.C. Cir. 1996), we reviewed a professional
7
suspension and followed much the same approach later adopted
in Kokesh, concluding that the suspension of a broker for
inadequately supervising a subordinate who had stolen from
customers’ accounts was a “penalty” for section 2462 purposes.
Professional suspensions, we explained, in contrast to remedies
like restitution, “are not directed toward correcting or undoing
the effects” of wrongdoing. Id. at 491. Significantly, however,
we made clear that the section 2462 inquiry does not extend to
all other contexts, distinguishing the separate question whether
a license suspension constitutes “punishment in various
constitutional contexts” and observing that in such cases “the
main focus . . . [is] on whether the law imposing the sanctions
has an overall remedial purpose of protecting the public (with
the sanctions being the reasonable means of achieving that
purpose).” Id.; see also id. at 491 n.11 (“It is clearly possible
for a sanction to be ‘remedial’ in the sense that its purpose is to
protect the public, yet not be ‘remedial’ because it imposes a
punishment going beyond the harm inflicted by the
defendant.”).
Consistent with Johnson’s emphasis on the limited reach
of the section 2462 inquiry, our subsequent cases make clear
that a sanction may be “remedial” under section 78s(e)(2) even
if it is aimed at protecting the public and not at correcting the
effects of wrongdoing. In one case, concerning a lifetime bar
against an NASD member’s president for failing to respond to
information requests, we held that the Commission had
adequately justified the bar as “remedial” for section 78s(e)(2)
purposes by offering “adequate reasons for holding the
sanction[] [was] warranted to protect investors.” PAZ
Securities, 566 F.3d at 1175–76. In another case, we again
explained that “[t]he Commission may impose sanctions for a
remedial purpose, but not for punishment,” and approved a one
year suspension because its “purpose . . . was not to punish [the
violator], but rather to protect the public from his demonstrated
capacity for recklessness in the present, and presumably to
encourage his more rigorous compliance . . . in the future.”
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McCurdy, 396 F.3d at 1264–65. And most recently, we
approved the Commission’s imposition of consecutive
suspensions against a securities industry supervisor because
they were imposed “not to punish [the supervisor], but rather to
protect the public,” and were therefore “remedial.” Siegel, 592
F.3d at 158. Together, these cases stand for the proposition that,
in this circuit, the section 2462 inquiry does not automatically
extend to other legal contexts, and, in particular, that it does not
apply to the Exchange Act provision at issue here. Saad, in
effect, asks us to read Kokesh as impliedly overturning that line
of precedent. “[T]his Court imposes a substantial burden on a
party advocating the abandonment of an established
precedent.” United States v. Burwell, 690 F.3d 500, 515 (D.C.
Cir. 2012). Saad’s argument suggests at most only that the
Supreme Court “might, in some future case, come to question
our approach”—hardly enough for us to jettison our well-
established prior decisions. Id.
But even that predictive inference stretches Kokesh too far.
Indeed, more recent Supreme Court precedent confirms that
Kokesh has no bearing on the Exchange Act. In Liu v. SEC, 140
S. Ct. 1936 (2020), the Court considered whether the
Commission may seek disgorgement as equitable relief in a
civil enforcement action, a question expressly reserved in
Kokesh. See Kokesh, 137 S. Ct. at 1642 n.3. The Exchange Act
authorizes the Commission to punish securities fraud in civil
proceedings by pursuing “equitable relief,” 15 U.S.C.
§ 78u(d)(5), which “historically excludes punitive sanctions,”
Liu, 140 S. Ct. at 1940. In Liu, the Court held that
disgorgement, at least when limited to the wrongdoer’s gains
and returned to investors, nonetheless falls within equitable
bounds. See id. at 1946–47. Notably, the Court did not find that
the opposite result flowed from Kokesh’s broad statement that
“[d]isgorgement, as it is applied in SEC enforcement
proceedings, operates as a penalty under § 2462.” Kokesh, 137
S. Ct. at 1645. Nor did it apply Kokesh’s framework for
distinguishing remedial sanctions from punitive penalties.
9
Instead, it conducted a historical inquiry to determine whether
disgorgement “falls into those categories of relief that were
typically available in equity.” Liu, 140 S. Ct. at 1942–46
(internal quotation marks omitted). That the Court declined to
reflexively apply Kokesh and instead independently analyzed
the meaning of “remedial” within the separate set of cases
relevant to the statutory inquiry before it makes clear that we
should proceed similarly here.
Reinforcing that conclusion, the statutory scheme at issue
here differs significantly from the one in Kokesh. “Kokesh
involved a different sanction (disgorgement), imposed under a
different statute under an entirely different type of Commission
proceeding, to enforce public law not industry professional
standards, and involved markedly different remedial and
protective implications for private industry and private
investors.” Saad II, 873 F.3d at 311 (Millett, J., dubitante in
part). Those differences provide a compelling reason for
distinguishing Kokesh, especially given the Court’s emphasis
on the narrowness of its holding. See Kokesh, 137 S. Ct. at 1642
n.3 (“The sole question presented in this case is whether
disgorgement, as applied in SEC enforcement actions, is
subject to § 2462’s limitations period.”).
A final point. In arguing that Kokesh, if applicable, would
proscribe his sanction—a question we need not reach—Saad
acknowledges that the Exchange Act expressly authorizes
FINRA to impose bars and the Commission to review and
sustain them. 15 U.S.C. §§ 78o-3(b)(7), (h)(3). Extending
Kokesh to generally prohibit bars as unduly punitive would thus
conflict with other portions of the Exchange Act. Given a
readily available alternative reading, we should avoid adopting
such an internally contradictory interpretation of a statute. See
FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133
(2000) (“A court must . . . interpret [a] statute as a symmetrical
and coherent regulatory scheme and fit, if possible, all parts into
a[] harmonious whole.” (citations omitted) (internal quotation
10
marks omitted)). Seeking to avoid this tension, Saad argues that
his approach would not proscribe all bars, but instead only
require FINRA to first consider the magnitude of individual
misconduct, rather than “‘simply wave the “remedial card” and
thereby evade meaningful judicial review of harsh sanctions.’”
Pet’r’s Br. 46–47 (quoting Saad II, 873 F.3d at 306
(Kavanaugh, J., concurring)). But the history of this very case
demonstrates that no such “remedial card” exists. As we
explained in remanding the Commission’s initial decision for
further explanation, “[i]f the Commission upholds a sanction as
remedial, it must explain its reasoning in so doing,” meaning,
at a minimum, that it “should carefully and thoughtfully address
each potentially mitigating factor supported by the record.”
Saad I, 718 F.3d at 913–14.
To sum up, then, “binding circuit precedent . . .
establish[es] that the Commission may approve expulsion not
as a penalty but as a means of protecting investors.” Saad II,
873 F.3d at 310 (Millett, J., dubitante in part) (internal
quotation marks omitted). That is precisely what the
Commission did in this case. And because this court has already
held that the Commission appropriately concluded that Saad’s
bar was not “excessive or oppressive” in any other respect, see
id. at 302–04, that ends our inquiry.
III.
For the foregoing reasons, the petition for review is denied.
So ordered.