Lawsuit questions Finra’s ability to bar brokers


A broker barred by Finra from the financial industry is taking his case back to a federal appeals court, where he hopes to limit its ability to impose such a sanction.

John M.E. Saad requested an oral argument in theU.S. Court of Appeals for the District of Columbia Circuit on Wednesday. In a brief filed with the court, he argued that having been barred by the Financial Industry Regulatory Authority Inc. for falsifying expense accounts was too harsh a penalty.

He also asserted that his bar was punitive rather than remedial and is inconsistent with a 2017 Supreme Court decision that limited the Securities and Exchange Commission in seeking the recovery of ill-gotten gains because it held that so-called disgorgement is a penalty.

Mr. Saad originally took his case to the D.C. Circuit Court of Appeals, where a three-judge panel remanded it to the SEC to determine whether the Supreme Court case, Kokesh v. SEC, applied to Mr. Saad’s circumstances.

Last August, the agency upheld the Finra bar, ruling that Kokesh only affected pecuniary sanctions and that a Finra industry bar is “remedial” rather than a “penalty.”

“This conclusion cannot be squared with Kokesh, which makes clear that Mr. Saad’s lifetime bar is punitive,” according to Mr. Saad’s brief. “Indeed, the facts of this case underscore the wisdom of the Kokesh framework. After all, it would be odd to suggest that such a severe and disproportionate penalty — a lifetime ban for a misappropriation of a small sum [$1,144] nearly 15 years ago — should be viewed as remedial. This court should reverse the SEC’s order.”

In September 2007, Finra brought a disciplinary action against Mr. Saad for filing false expense reports in 2006 when he was a regional director in the Atlanta office of Penn Mutual Life Insurance Co. During the investigation, Mr. Saad allegedly made multiple false statements. Finra then imposed the bar.

If the court sides with Mr. Saad, the brokerage industry’s self-regulator could have its hands tied in trying to bar brokers in the future.

“If they have to rethink their approach to sanctions based on a new framework, that’s going to be very significant,” said John Curley, a partner at Hoguet Newman Regal & Kenney. “You may see fewer lifetime bans and when you do see them, you may see Finra going the extra mile to explain the basis for each bar with more particularity than they have in the past.”

In the court’s remand to the SEC, one of the judges on the panel, Brett Kavanaugh, filed a concurring opinion, in which he wrote that following the Supreme Court’s Kokesh decision, the SEC and Finra would have to provide more detail to justify an industry bar. In 2018, Mr. Kavanaugh joined the Supreme Court.

Brad Bennett, former Finra executive vice president for enforcement, said Mr. Saad’s appeal will be taken seriously by the court because of Mr. Kavanaugh’s opinion.

But Mr. Bennett said the argument doesn’t hold water because Finra rules are not federal laws. They’re are simply requirements for brokerages and registered representatives who are members of the organization.

“Finra, for want of a better analogy, is kind of like a club,” said Mr. Bennett, who is now managing partner of a legal and consulting firm, Vernon’s Gate Partners. “The club has rules and standards it imposes on its members, and if you don’t meet those standards, you’re kicked out of the club. That’s what Finra sanctions actually mean. That’s the ‘self’ in ‘self-regulatory.’”

In the case of Mr. Saad, it is easy for Finra to justify throwing him out of the industry, Mr. Bennett said. “You don’t want people handling money who steal.”

The D.C. Circuit Court of Appeals has not set a hearing date.

Written by Investors Wallets

How advisers around the world are navigating the pandemic

Loan provider adds 401(k) service for debtweary workers