Securities Fraud is a catch-all term that applies to a number of white collar crimes that involve misrepresentation of information in order to induce an investor into making a certain investment decision. It can also involve manipulation of the financial markets, Securities fraud is aggressively prosecuted by the U.S. Attorney’s Offices nationwide and frequently involves a parallel civil enforcement action brought by a regulator, such as the U.S. Securities and Exchange Commission or Commodity Futures Trading Commission.

Who Investigates and Prosecutes Securities Fraud?

Typically, it is the federal prosecutors and federal agents that handle criminal securities fraud investigations and prosecutions. However, New York State Attorney General also has jurisdiction over investigations of fraud in offer, sale, or purchase of securities of companies that conduct business in New York State. Unlike the U.S. Department of Justice which has jurisdictions over criminal violations of federal securities laws, the New York State Attorney General’s Office has oversight over both New York civil and criminal violations of securities laws on the state level.

What Statute is Applicable to Federal Securities Fraud Prosecutions?

Securities Fraud Prosecutions Under 18 U.S.C. Section 1348

Federal Securities Fraud is frequently prosecuted under 18 U.S.C. Section 1348. Under 18 U.S.C. Section 1348, it is a crime to knowingly execute, or attempt to execute a scheme or artifice that is defined to either:

  1. Defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer, OR
  2. Obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l).

Violations of 18 U.S.C. Section 1348 are punishable by:

  • Up to 25 years in prison,
  • Up to 3 years of supervised release, AND
  • Up to $5 million dollars in fines.

The exact sentence, however will be determined by the sentencing judge with the Federal Guidelines serving as the starting point of the Judge’s analysis of the appropriate sentence.

Securities Fraud Prosecutions Under 18 U.S.C. Section 371

In some situations, rather than bringing criminal charges under 18 U.S.C. 1348, the federal government brings criminal charges under 18 U.S.C. Section 371, which is the Conspiracy statute. Simply put, a conspiracy is an agreement between two or more individuals to commit a crime. Frequently, minor participants in securities fraud cases are charged through this conspiracy statute, because it is punishable by up to 5 years, rather than the 25 year maximum for securities fraud under 18 U.S.C. 1348.

What Statute is Applicable to New York State Securities Fraud Prosecutions?

Although most securities fraud cases are prosecuted by the federal prosecutors at the U.S. Attorney’s Offices nationwide, New York State has comprehensive legislation called The Martin Act that imposes both civil and criminal penalties for securities fraud involving companies that offer securities for sale in the State of New York. The Martin Act is codified in New York General Business Law Article 23-A, Sections 352–353.

Specifically, Section 352-c explains conduct that constitutes misdemeanors and felonies relating to securities fraud under New York State Law. It is prohibited for any person, corporation, partnership, company, trust, or association or any of the agent thereof to engage in:

  1. Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale;
  2. Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances;
  3. Any representation or statement which is false, where the person who made such representation or statement:
    1. Knew the truth; or
    2. With reasonable effort could have known the truth; or
    3. Made no reasonable effort to ascertain the truth; or
    4. Did not have knowledge concerning the representation or statement made; Where engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase within or from this state of any securities or commodities, as defined in section three hundred fifty-two of this article, regardless of whether issuance, distribution, exchange, sale, negotiation or purchase resulted.
  4. Any artifice, agreement, device or scheme to obtain money, profit or property by any of the means prohibited by this section.
  5. The sale of any securities or commodities, as defined in section three hundred fifty-two of this article, within or from the state of New York to represent that they are an “exchange” or use the word “exchange,” or any abbreviation or derivative thereof, in its name or assumed name unless it is registered with the Securities and Exchange Commission as a national securities exchange, pursuant to section six of the Securities and Exchange Act of 1934, or unless it has been designated as a contract market by the Commodity Futures Trading Commission, pursuant to section five of the Commodity Exchange Act.

Penalties for Violations of New York Martin Act

Violations of New York’s Martin Act are generally misdemeanors and are thus punishable by up to one year in jail. However, there are a few exceptions that elevate the severity of the crimes to felonies. These exceptions are:

  • Engaging in a scheme constituting ongoing course of conduct with intent to defraud ten or more persons or to obtain property from ten or more persons by case of fraudulent pretenses, representations or promises and obtains property from one or more persons renting to promotion, issuance, distribution, exchange, sale or purchase of any securities or commodities.
  • Intentionally engaging in fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale, or who makes any material false representation or statement with intent to deceive or defraud,
  • while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation or purchase within or from this state of any securities or commodities, and thereby wrongfully obtains property of a value in excess of $250.

Both of these situations are non-violent Class “E” felonies. That means, if convicted, at a minimum you will be facing probation or a conditional discharge. At a maximum, you will be facing four years in prison.

What Conduct Constitutes Securities Fraud?

As both the federal and New York State statutes are very broad, much of the conduct can be classified as securities fraud. Common examples of securities fraud involve:

  • Insider Trading
  • Dummy Corporations
  • Ponzi Schemes
  • Accounting Fraud
  • Churning
  • Advance-Fee Schemes
  • Broker Embezzlement

Insider Trading

Insider trading involves buying or selling of securities on the basis of non-public material information. Material non-public information is any information that is not known by the general market, that can impact the investor’s decision to buy or sell a security. Insider trading cases can be both criminal and civil in nature. Importantly, both the “tipper” – the person sharing the material non-public information and the “tippee” the person receiving and trading on this information can be prosecuted. As the Supreme Court held in Salman v. United States, the “tippee” does not need to receive a personal benefit from using this material, non-public information in making a trade.

Dummy Corporations

Another type of securities fraud is offering shares for sale through an initial public offering of corporations that do not exist. Frequently, this is accomplished by providing to unsuspecting investors Form 4 issued by the Securities and Exchange Commission to confirm the purchase of securities.

Ponzi Schemes

Ponzi schemes involve paying promised returns to early investors with funds obtained from later investors. Frequently, these investments are described as low-risk, while promising a high rate of return regardless of market conditions. The most well-known example of the Ponzi scheme is the one operated by Bernie Madoff that resulted in $170 billion loss to his investors.

Accounting Fraud

Accounting Fraud is the type of securities fraud that involves the company providing false or inaccurate information regarding the company’s financial performance. This frequently happens by:

  • Overstating revenue and company’s financial performance,
  • Understating expenses and company’s financial obligations,
  • Misusing corporate assets for other purposes.

Churning

Churning involves a broker engaging in frequent trades in the client’s account in order to generate commissions on the trades, rather than acting in the best interests of the client and the client’s portfolio strategy. Churning is problematic to the owner of the financial portfolio in that it may result in financial losses and higher tax liability.

Advance-Fee Schemes

Advance-Fee Schemes ask investors to pay a fee upfront prior to receiving any stock, money or proceeds and the fee is necessary for the deal to go through. Advance-Fee Fraud does not necessarily involve securities fraud. These schemes are also prevalent in lottery winning schemes, inheritance schemes and found money schemes.

Broker Embezzlement

Broker Embezzlement is a type of securities fraud in which the broker obtains lawful access to the investment funds, but then uses the funds for an impermissible purpose. Embezzlement does not always involve an outright taking or theft of the client’s funds. It can also involve the broker moving the money into a different unauthorized account.

What Are Some Common Defenses to Securities Fraud?

No two securities fraud cases are alike and thus it is essential to consult an experienced securities fraud defense attorney to develop a thorough defense strategy. However, generally speaking, common defenses ro securities fraud are:

  • Good Faith Belief
  • Lack of Knowledge
  • No Harm to the Investors

Parallel Civil Proceedings

Frequently, criminal securities fraud proceedings also have a parallel civil enforcement action brought by the Securities and Exchange Commission or another regulator. Although the civil case and the criminal case may be predicated on the same conduct, these two parallel actions will need different approaches and strategies.

Importantly, it is helpful to remember that although the U.S. Department of Justice and the civil regulatory agency are separate and distinct agencies, they are working together in bringing their respective cases against you. Frequently, the criminal case for securities fraud may be initiated by a referral made by the Securities and Exchange Commission to the U.S. Attorney’s Office. Similarly, the Enforcement Division of the Securities and Exchange Commission is permitted to share its investigative files with the Department of Justice upon a written request.

How Can the Civil Securities Case Impact My Criminal Case?

Decisions you make on your civil case can greatly impact your criminal case. That is because whatever documents you produce to the Securities and Exchange Commission, along with your on-the-record testimony can be forwarded to the U.S. Attorney’s Office and become part of their case. While you may not think this is problematic, by providing documents or testifying in a certain way during your OTR testimony, you may be locking yourself into a certain defense strategy on the criminal case. Additionally, there is virtually no discovery that the U.S. Attorney’s Office can request from a defendant in a criminal case because of the Fifth Amendment Privilege against self-incrimination. On a civil case, the SEC can compel the production of documents because the Fifth Amendment privilege applies to individuals, but not corporations.

Usually, it makes sense to have the same attorney representing you on the criminal case as well as on the civil enforcement action. That way, you and your attorney can make decisions regarding strategy on both cases together. Sometimes, it makes sense to request a stay on the civil enforcement matter until the resolution of the criminal case. That way, you can property focus on one case at a time, without committing yourself to a certain defense prematurely.

Contact Top Rated Securities Fraud Attorneys Today

If you have have questions regarding securities fraud, or need representation on a civil or a criminal securities fraud matter, please contact us. We have represented numerous clients on civil securities fraud cases, criminal securities fraud cases and joint investigations conducted by the regulators and the U.S. Department of Justice.