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Understanding Criminal Violations of the Federal Securities Laws

Introduction

An investigation by the Securities and Exchange Commission (“SEC”) could lead to a civil enforcement proceeding by the SEC or a criminal prosecution by the Department of Justice (“DOJ”). Section 24 of the Securities Act of 1933 and Section 32 of the Exchange Act of 1934 provide that any person or entity may be criminally prosecuted for willful violations of the federal securities laws. Additional criminal penalties can be imposed by other statutes such as the Sarbanes-Oxley Act of 2002 (“SOX”), which prohibits fraudulent activities with respect to the securities and accounting transactions of public companies.

Whether an investigation for violations of the federal securities laws will proceed civilly or criminally depends on the circumstances of each case. However, criminal prosecutions are typically more severe since they entail significant criminal penalties, injunctions, disgorgement orders, and possibly jail time. Along with the assistance of U.S. attorneys throughout the nation, criminal violations of the securities laws are prosecuted by the Fraud Section of the Criminal Division within the DOJ.

Examples of Criminal Securities Laws Violations

The federal government aggressively prosecutes securities fraud-related cases. This trend of aggressive criminal enforcement—particularly by the DOJ—has increased in recent years and months especially considering the advent of novel technologies such as coin offerings, digital assets, cryptocurrencies as well as unprecedented viruses that continue to plague the nation. Because of this, it is important to be aware of how the government’s enforcement stance could affect your business.

Below are notable examples of securities law violations that could likely lead to a criminal prosecution:

  • Ponzi and pyramid schemes;
  • Insider trading situations by high-ranking members in the business;
  • Embezzlement cases;
  • Backdating options;
  • Falsifying and concealing documents regarding stock;
  • Making false statements to the government, shareholders, or external auditors;
  • Accounting fraud such as inflated earnings or improper revenue recognition;

These above examples are only representative of securities law violations that could lead to criminal prosecution. Having said that, it is sometimes possible for federal agencies to proceed under other criminal statutory provisions in cases where the prosecutor is unable to prove all elements of criminal securities fraud. These additional statutes that can be used to target the criminal activity include perjury; making false statements to federal agents and knowingly deceiving federal agents; destruction of evidence; obstruction of justice; and other criminal provisions under other statutes including the Sarbanes-Oxley Act (“SOX”).

What are the Potential Penalties for Criminal Securities Law Violations?

If you are found criminally liable for securities fraud, the possible penalties include significant fines and prison time. Below are a few key criminal provisions that the government has in its arsenal to use against individuals and entities suspected of violating the federal securities laws:

  • Section 17(a) of the Securities Act of 1933. This section applies to the registration of securities and a company’s prospectus for the offering of securities. Section 17(a) makes it unlawful for any person in the offer or sale of securities or security-based swap agreement in interstate commerce to employ any device, scheme, or artifice to defraud; to obtain money or property by means of any untrue statement of a material fact or by an omission; or to engage in a transaction that would act as a fraud or deceit upon the purchaser. Willful violations of this provision are considered felonies and can subject the individual to a fine of not more than $10,000, five years imprisonment, or both.
  • Section 5 of the Securities Act of 1933. The DOJ also prosecutes defendants under this section for selling unregistered securities. It makes it unlawful—without a registration statement—to offer, sell, or buy a security through the use of a prospectus in interstate commerce. Its violation subjects the defendant to not more than $10,000 in fines and not more than five years imprisonment.
  • Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. This provision is generally the most utilized by the government. It is also used for criminal allegations of insider trading. Broadly, these provisions make it unlawful for any person in interstate commerce to use or employ—in connection with the purchase or sale of any security on a national exchange, or any security not so registered, or any securities-based swap agreement—any manipulative or deceptive device in contravention of the rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors. If the DOJ prosecutes the case as criminal securities law violations—insider trading—the penalties include a maximum of 20 years imprisonment and fines of $5,000,000 for an individual and $25,000,000 for a corporation.
  • Section 1348 of the Sarbanes Oxley Act of 2002 (“SOX”). This section targets securities and commodities fraud. As a starting point, SOX applies to corporate officers and executives who engage in fraudulent activity involving the reporting requirements of a public company with the SEC. It prohibits anyone from knowingly executing a scheme or artifice (1) to defraud any person in connection with any commodity, option, or security of an issuer or (2) to obtain—by fraud or false representations—any money or property in connection with the purchase or sale of any commodity, option, or security of an issuer. Defendants who violate this section could be fined or imprisoned for up to 25 years, or both.
  • Section 1350(c) of SOX. The section makes it a criminal offense for corporate officers and executives to certify a corporate report knowing that it does not comply with the Act. This violation subjects the individual to a fine of not more than $1,000,000, or imprisonment of not more than 10 years, or both. This section also makes it a crime for corporate officers and executives to willfully certify any statement knowing that the periodic report accompanying the statement does not comply with the Act—which subjects the defendant to a fine of not more than $5,000,000, or imprisonment not more than 20 years, or both.

How to Respond to Allegations of Criminal Violations of the Securities Laws

It is important to respond to an investigation, allegation, or indictment of securities fraud as soon as possible. The consequences could be severe especially if criminal charges are alleged. First and foremost, choosing the right attorney will be critical to your defense. Your attorney should have extensive knowledge in defense work, federal prosecutions, securities laws, trial procedures, and individual and corporate defense, as the Senior Criminal Securities Fraud Defense Attorneys at Oberheiden P.C. emphasize.

Your attorney should be competent in both compliance analysis as well as criminal securities law defense. In some cases, an attorney can help you avoid a protracted criminal prosecution. If you are already under significant scrutiny or have been indicted, your attorney will work with you and the government to lessen your fine and penalty. For instance, an attorney can negotiate a non-prosecution agreement on your behalf, whereby the government agrees not to prosecute you in exchange for your cooperation in divulging the names of individuals and entities who have engaged in certain fraudulent conduct.

“Cooperating with the federal government who is investigating or prosecuting your case is oftentimes a good way to receive leniency in your fines and sentence. However, negotiating non-prosecution agreements can be complex and require the continual assistance of an attorney experienced in dealing with the government in securities fraud-related matters. This is why it is vital to retain an attorney right away” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Conclusion

Criminal securities fraud allegations can be devastating for the future of a business. Criminal prosecutions by the DOJ can lead to significant fines and penalties in the multi-millions, lengthy imprisonment terms, and permanent reputational harm. The DOJ has ample statutory tools to use against violating individuals and entities and has continued to increase its prosecutorial efforts against such defendants. The main statutes relied upon include the Securities Act of 1933, the Exchange Act of 1934, and the Sarbanes Oxley Act of 2002. Therefore, it is critical to retain an attorney as soon as possible when you are under investigation for securities fraud or have already been indicted. An attorney from Oberheiden P.C. can evaluate the effectiveness of your compliance program, defend you against federal accusations, and negotiate for leniency on your behalf. Contact us today.

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