Review of Securities Fraud, SEC Violations and Defenses
The federal securities law under 18 U.S.C. § 1348 is generally similar to the 18 U.S.C. § 1341 mail fraud and 18 U.S.C. § 1341 wire fraud statutes that make it a federal crime to defraud someone related to a security, or acquire money or property using false pretenses.
Securities fraud is described as defrauding someone connected to a security or commodity, or obtaining any money or property from the purchase or sale of a security by using means of false or fraudulent pretenses, representations, or promises.
Generally, a “security” is a financial instrument where somebody or an entity makes an investment seeking to earn a return.
Accusations of securities fraud and other SEC violations are normally pursued against individuals, corporations, and securities brokers.
When people hear words like securities, SEC violations, and insider trading, they tune out because they don't think these words apply to them.
So you might be surprised to learn that in California, you can be accused of securities fraud if you improperly raise money for your small business or sell stock in a family-owned business in an improper way. The securities law applies equally to Wall Street and Main Street.
So if you are facing securities fraud charges in California or have been charged with a federal SEC violation and don't know where to turn, our Los Angeles criminal defense lawyers are providing some basics about the law to help you feel more in control.
What Is a Security?
When you think of securities, think of stocks and bonds. The formal definition of a security is a fungible, negotiable financial instrument that holds monetary value.
In more practical terms, securities are a type of investment that includes:
- Stocks - ownership interests in a publicly-traded or private company,
- Bonds - a loan from an investor (you) to a borrower (a company or government body),
- Investment contracts,
- Options - the right to buy an ownership interest (i.e., stocks and bonds) or other assets at a specific price within a particular time period, or
- Any combination of all of the above.
A “commodity” is a good that is traded on the open market, such as gold, oil, and natural gas.
An Investor can buy and sell options on commodities that allows buying or selling at a certain price at a future date.
Thus, if somebody who is involved with securities and commodities, like a broker or investor, lies in order to get a financial advantage, they could be facing federal criminal charges of 18 U.S.C. § 1348 securities and commodities fraud.
There are two categories of behavior related to executing an illegal scheme:
- defraud somebody in connection with commodities, options, or securities transaction;
- obtain money by false pretenses, representations, or promises related with a commodity or securities transaction.
What Does the Security Law Regulate?
The securities law provides the rules by which business owners and governmental bodies can raise money for their organizations by selling stocks and bonds to investors.
If an investor buys a security (stock or bond), he has a right to a share of the company's profits, but no say in the management or day-to-day operations.
Securities law regulates that transaction. On the other hand, if an investor becomes involved in managing the company's day-to-day operations, securities law generally does not apply.
In the United States, both federal and state laws regulate securities. Generally speaking, if your matter involves the offer or sale of securities within California, it is a state law issue.
If it involves more than one state, it is a federal issue. Although, it is not uncommon for someone facing criminal securities fraud to be charged on both the state and federal level.
Federal Securities Law
The Securities Act of 1933 regulates the offer and sale of securities in the United States.
The Securities and Exchange Commission (SEC) enforces the laws and regulations under this act and investigates violations. Some common violations include:
- Fraudulent schemes, such as ponzi or pyramid schemes,
- Theft of money or securities,
- Insider trading,
- Pump and dump,
- Boiler rooms,
- Accounting fraud,
- Manipulating the market price of an investment,
- Making false or misleading statements about a company,
- Selling fraudulent or unregulated securities, or
- Violating the broker-dealers' responsibility to treat customers fairly.
Insider trading occurs when a company employee, or associate, has some information that is not known by the general public. Then, they use this knowledge to buy or sell a security to make a profit.
Put simply, it's the illegal practice of trading on the stock exchange to your advantage by use of confidential information.
“Pump and dump” occurs when a broker or investor spreads false information about a security in an effort to get other people to buy it, which in turn will inflate the price so they can quickly sell it for a profit.
Churning occurs when a broker persuades their client to excessively trade in order to generate more fees and commissions. Put simply, churning is a failure to act in the best interest of their clients for which they are legally obligated as fiduciaries.
Misrepresentation occurs when someone attempts to manipulate the value of a security in order to make a profit later by use of making false statements.
Accounting fraud occurs when an accountant intentionally falsifies a company's accounts in order to misrepresent assets and liabilities, which will affect the value of their securities.
The SEC decides whether to bring a case in federal civil court or before an administrative law judge.
Additionally, if it deems that criminal charges are appropriate, the SEC will transfer the matter to the Department of Justice.
California Securities Law
The Corporate Securities Law of 1968 regulates the offer and sale of all securities in California.
This law establishes the licenses, filing requirements, and other regulations for securities in the state.
The Department of Financial Protection and Innovation enforces securities law in California and can decide whether to charge a violation administratively, civilly, to transfer the matter for criminal fraud charges.
In California, you'll face criminal charges for securities fraud if you:
- Engage in insider trading;
- Sell unqualified securities (securities not cleared by the government for sale) or securities exempt from qualification;
- Give false or misleading statements in the sale of securities;
- Sell securities that don't comply with qualification terms; or
- Exhibit misleading behavior in the purchase or sale of securities (i.e., market manipulation).
Penalties for Criminal Securities Fraud
The penalty for willful violation of federal securities laws is imprisonment for up to 25 years or a fine, which will depend on the nature of your case.
Criminal securities fraud is a "wobbler" offense at the state level, meaning prosecutors may grade the crime as a felony or misdemeanor offense, depending on the circumstances.
An Insider trading conviction could result in a $5 million fine, while other types of securities fraud can carry a $10,000 fine. Further, since this type of white collar crime typically results in a financial loss, the court will order a defendant to pay restitution.
Probation could be awarded, but only if there was one count of fraud and no financial loss.
For criminal matters graded as felonies, if you willfully sell unqualified or exempt securities or sell securities that don't comply with qualification terms, the potential penalties are:
- Up to one million dollars ($1,000,000) in fines,
- Up to 3 years in prison, or both.
If you willfully engage in insider trading, market manipulation, or make false or misleading statements, the potential penalties are:
- Up to ten million dollars ($10,000,000) in fines,
- Up to 3 years in prison, or both.
Best Defenses for Securities Fraud Cases
If you are under a criminal investigation, or already charged with 18 U.S.C. § 1348 securities fraud or an SEC violation, you will need an experienced criminal defense lawyer to give you the best chance at a favorable outcome.
The federal government has almost limitless resources to build a criminal case against you.
Often during an investigation for alleged securities fraud and SEC violations, you will not even know there is an investigation.
Once you become aware, crucial evidence has already been obtained by investigators.
Our law firm can guide you through the investigative and federal court process. We can begin preparing a defense strategy for best possible outcome.
A federal prosecutor must be able to prove, beyond a reasonable doubt, you intentionally misrepresented or provided false information causing investors to sustain a financial loss.
We might be able to make a reasonable argument the loss in question was not due to information relied upon by the investor. Further, we might be able to show your actions were not negligent or criminal.
Eisner Gorin LLP has two office locations in Los Angeles County, including Century City and Van Nuys. Call us to review the details of your case at (877) 781-1570, or use our contact form.