I’VE HEARD THE TERM “SECURITIES FRAUD” BEFORE, BUT WHAT EXACTLY IS A “SECURITY”?
In the simplest terms, a “security” is a catch-all term for any intangible investment; stocks, bonds, mutual funds, interest in a company, interest in minerals, or a mineral lease, etc.
However, “securities” are further divided into two types, debt securities and equity securities.
Debt securities include CDs and Bonds. They are called “debt securities” because when you purchase them, the company you purchase them from is now “in debt” to you for the purchase price plus the guaranteed interest.
Equity securities are generally collectively called “stocks” and refer to any security that gives the purchaser an “equity” stake in the company, interest, or lease that is selling the stock. In other words, it gives the purchaser part ownership.
One of the most important benefits to securities is that they are “liquid” investments, meaning that they can be sold immediately for whatever their worth. Where other investments and assets may take time to sell – such as a coin collection, a classic car, or a house – securities can be cashed out at any time for their current value.
Please Note: Nevada excludes insurance policies, annuity contracts, and pensions from the legal definition of securities.
OKAY, SO WHAT IS “SECURITIES FRAUD”?
Securities Fraud is an example of what is often called a “white-collar” crime involving the deliberate use of deception to gain an unfair advantage in the securities market whether for buying securities, selling securities, or offering securities for sale or purchase. Some of the common formss of deception are:
- Providing false information about a security;
- Withholding key information about a security;
- Intentionally offering bad advise;
- Selling unregistered securities (N.R.S. 90.460);
- Trading on the stock market based on inside information that has not been publicly disclosed, or is not publicly known (commonly known as “insider trading”).
- Creating a fake account to buy and sell with;
- Investing in unneccesarily risky ventures without disclosing the risks to the client;
- Buying or selling stocks without the client’s consent;
- Buying or selling securities in an effort to generate more commission for themselves (sometimes called “churning”);
- Focusing too much of a client’s funds into one investment instead of spreading the funds out to lessen the risk and mitigate possible losses (someimes called “over concentration).
WHAT HAPPENS IF SOMEONE IS FOUND GUILTY OF SECURITIES FRAUD?
Securities Fraud is regulated by both Federal and State laws and provides for both criminal and civil liability.
Federal Criminal Liability
The Federal Government regulates security fraud through the Securities and Exchange Commission (SEC). If it finds that a crime may have been committed, then the Department of Justice (DOJ) will review the case and decide whether to bring criminal charges. If criminal charges are filed, the penalties are based on what type of securities fraud was committed.
- Providing false information, or withhlding material information, about stocks or providing false or bad advise about a stock – Found at 15 U.S.C. 77q, this is known as Fraudulent registration of securities and carries fines of up to $10,000 and/or up to 5 years in prison.
- Insider trading – Found at 15 U.S.C. 78j, insider trading carries a prison term of up to 20 years in a federal prison and/or up to 5 million dollars in fines. If the offender is a corporation, then the corporation may be fined up to 25 million dollars.
- Sale of unregistered securities – Found at 15 U.S.C. 77e, this crime carries with it a maximum penalty of 5 years in a federal prison and/or up to $10,000 in fines.
- Fraudulent reporting – Known as the Sarbanes Oxley Act of 2002 and found at 18 U.S.C. 1348, corporate officers that are convicted of committing fraud with regard to reporting requirements face up to 25 years in prison and/or fines. Moreover, coporate officers who knowingly certify a false report can be fined up to 5 million dollars and/or be sentenced to a maximum of 20 years in prison.
State Criminal Liability
In addition to the securities violations mentioned above, in Nevada it is also a violation to act as a broker without first being licensed (or being exempt) as detailed in N.R.S. 90.310-90.450.
If a person violates Nevada State law regarding Securities trading (N.R.S. Chapter 90), they can be charged with a categry B felony which requires:
- Imprisonment in a state prison for at least 1 year, but not more than 20 years; and/or
- A fine of up to $500,000;
- Restititution payment.
In addition the Court may also order that the person be required to repay the costs of investigation and prosecution.
Please Note: A person can only be criminally liable for securities fraud if he or she willfully committed the misconduct. If the conduct was merely negligent, then the person cannot be held criminally liable, and the only means left is civil litigation.
Either a person’s victim or the SEC, on behalf of the Federal Government may sue a person who has negligently committed securities fraud.
If the suit is filed by the SEC, then the case will take place in Federal Court.
If the suit is filed by a private individual, it will be in Nevada District Court.
Civil prosecution seeks to impose the following penalties on the Defendant:
- Restitution of the cost of the Security;
- Interest from the date of payment, less income received on the security;
- Reasonable attorneys fees and costs.
IF I HAVE BEEN ACCUSED OF SECURITIES FRAUD, DO I HAVE ANY DEFENSES?
Although the strength of any possible defenses will be highly contingent on the specific facts of each case, the following is a list of common defenses for securities fraud.
- Lack of Intent – This argument turns on the Defendant’s knowledge that his/her act was a violation. This is generally only a defense to criminal charges as civil liability can still apply if the defendant acted negligently.
- Good Faith – This is somewhat related to Lack of Intent as it is premised on the defendant’s “good faith intent” behind his/her actions. For example, an employer may have information that would make it illegal for him to trade on a specific company. If he then tells an employee to make the trades and the employee has no reason to think there is something wrong with the deal and acts on the good faith intent to make a legal trade per the employer’s instruction, the employee may not be criminally or civilly liable. Lack of intent would likely be a defense to the criminal charges, but so long as the employee could prove that there was no negligence involved in his/her actions (in other words, that he had no reason to believe there was impropriety in the trade), then the employee is unlikely to be found negligent.
- Government Misconduct – There are occassions where the SEC, or the Securities Division of the Nevada Secertary of State conducts an improper investigation into securities violations. Typically the investigation has faults for lack of a valid search warrant. In these cases, the evidence that is found because of the lack of a valid search warrant cannot be used at trial. When this happens the defense attorney should file a motion to suppress the evidence gathered during the improper investigation.
- Lack of Evidence – In criminal cases, the State always has the burden of proving that the Defendant committed the charged crime “beyond a reasonable doubt.” Where there is insufficient evidence to meet this burden, even if the lack of proof is a result of evidence being suppressed for improper investigation, the defendant should not be convicted.
WHAT DO I DO IF I’VE BEEN CHARGED WITH SECURITIES FRAUD, OR OTHER SECURITIES VIOLATIONS?
It is imperative that you speak with an attorney as soon as possible so that your rights are protected from the very beginning.