When Can a Federal Securities Fraud Investigation Lead to Criminal Charges?

Federal securities fraud investigations can lead to criminal charges in various circumstances. While most criminal cases involve charges under the Securities Exchange Act of 1934 and the federal securities fraud statute (18 USC Section 1348), federal prosecutors can (and do) pursue criminal charges under various other statutes as well. As a result, all types of securities fraud investigations can pose criminal enforcement risks—and this means that all investigations require a strategic and forward-thinking defense.

While most securities fraud enforcement actions at the federal level are either administrative or civil in nature, the Department of Justice (DOJ) can pursue criminal securities fraud charges when warranted. In criminal cases, securities issuers and other entities can face multi-million-dollar fines, and individuals can face both fines and prison time.

As a result, regardless of the circumstances involved, facing a federal securities fraud investigation is not a matter to be taken lightly.

Crucially, even if an investigation is administrative or civil in nature initially, it can lead to the empanelment of a federal grand jury if federal authorities uncover evidence (or apparent evidence) of a knowing or willful violation of the law. Once an investigation turns criminal in nature, avoiding unnecessary consequences requires a strategic and forward-thinking approach focused on all of the charges that are potentially on the table.

When is a Federal Securities Law Violation a Federal Crime?

From the Securities Act of 1933 to the Sarbanes-Oxley Act of 2002 (SOX), several federal securities laws include provisions for criminal enforcement. In practice, however, most securities fraud cases targeting fraudulent securities issuances, insider trading, broker-dealer fraud, and other similar types of offenses involve charges under either: (i) the Securities Exchange Act of 1934; or, (ii) the federal securities fraud statute (18 USC Section 1348).

Criminal Violations of the Securities Exchange Act of 1934

The Securities Exchange Act of 1934 prohibits an extremely broad range of fraudulent practices impacting the US securities markets. Congress enacted the Securities Exchange Act to protect both individual and institutional investors; and, while it is nearly 100 years old, the Securities Exchange Act remains one of the primary sources of federal authority used to pursue securities fraud cases.

Some examples of common allegations under the Securities Exchange Act of 1934 include:

• Making material misrepresentations or omissions that impact the price of securities
• Executing market manipulation schemes (i.e., pump-and-dump schemes)
• Engaging in front-running and insider trading

For these allegations (and others) to warrant criminal charges under the Securities Exchange Act, the DOJ must be able to prove willfulness. If a misrepresentation or omission is material but it isn’t willful, it may warrant administrative or civil penalties, but it does not warrant criminal prosecution. This is made clear in the criminal enforcement section of the Securities Exchange Act (15 USC Section 78ff), which states:

“Any person who willfully violates any provision of this chapter . . . or any rule or regulation thereunder . . . shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed.”

The substantial penalties available under Section 78ff make criminal prosecution under this statute an attractive option for federal prosecutors. However, federal prosecutors will often have other options for pursuing substantial penalties in criminal securities fraud cases as well—including charges under the federal securities fraud statute (18 USC Section 1348).

Criminal Violations of 18 USC Section 1348

Compared to the criminal enforcement provisions of the Securities Exchange Act, the federal securities fraud statute (18 USC Section 1348) offers both benefits and drawbacks for the DOJ. For example, while criminal charges under the Securities Exchange Act can carry up to a 20-year prison sentence, the maximum sentence under Section 1348 is 25 years of federal imprisonment. On the other hand, while fines under the Securities Exchange Act can reach $25 million for corporate defendants, fines under Section 1348 top out at $500,000 per violation.

Even more significantly, however, while the Securities Exchange Act requires evidence of “willfulness” in criminal cases, a conviction under Section 1348 can be based on a “knowing” violation of the law. This is a significantly lower standard—and, as a result, federal prosecutors may be able to substantiate criminal charges under Section 1348 even if they cannot substantiate criminal charges under the Securities Exchange Act.

Section 1348 is also extremely broad in scope. Under the statute, it is a federal criminal offense to either:

• Knowingly execute (or attempt to execute) a “scheme or artifice . . . to defraud any person in connection with any commodity[,] any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under . . . the Securities Exchange Act of 1934;” or,
• Knowingly execute (or attempt to execute) a “scheme or artifice . . . to 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[,] any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under . . . the Securities Exchange Act of 1934.”

Based on these two statutory provisions, federal prosecutors can pursue criminal charges against securities issuers, corporate insiders, investment brokers and advisors, private traders, and various other parties. Crucially, since Section 1348 covers both attempted and successful fraud schemes, evidence of investor losses is not required for prosecutors to seek a grand jury indictment.

Other Criminal Violations of Federal Securities Laws

As we mentioned above, while most federal criminal securities fraud cases involve charges filed under either 15 USC Section 78ff or 18 USC Section 1348 (or both), the DOJ can pursue criminal charges under various other federal securities laws as well. These include (but are not limited to):

• Section 5 of the Securities Act of 1933 – Section 5 of the Securities Act of 1933 establishes criminal penalties (up to a $10,000 fine and five years of imprisonment) for improperly selling unregistered securities.
• Section 17(a) of the Securities Act of 1933 – Section 17(a) of the Securities Act of 1933 establishes criminal penalties (up to a $10,000 fine and five years of imprisonment) for willful violations involving the sale and promotion of securities.
• Section 1350(c) of the Sarbanes-Oxley Act of 2002 (SOX) – Section 1350(c) of SOX establishes criminal penalties for knowingly and willfully certifying corporate reports that do not comply with the statute’s requirements. Knowing violations carry up to a $1 million fine and 10 years of imprisonment, while willful violations carry up to a $5 million fine and 20 years of imprisonment.

Since the penalties under these statutes are less severe than the penalties under 15 USC Section 78ff and 18 USC Section 1348, federal prosecutors will generally prefer to pursue charges under Section 78ff and Section 1348 when possible. With that said, if prosecutors can pursue charges under these other statutes as well, they will not hesitate to do so.

What Are the Other Risks of Facing a Criminal Securities Fraud Investigation?

Along with charges that specifically involve fraudulent securities-related practices, federal securities fraud investigations can lead to various other federal criminal charges as well. For example, in these cases, the DOJ routinely pursues charges such as:

• Wire Fraud – Under the federal wire fraud statute (18 USC Section 1343), it is a separate federal offense to use any means of wire communication (i.e., the internet) in connection with the commission, or attempted commission, of a fraudulent scheme. In securities fraud cases, wire fraud charges can potentially carry up to a $1 million fine and 30 years of federal imprisonment.
• Money Laundering – The federal money laundering statute (18 USC Section 1956) is extremely broad as well. As a result, federal prosecutors can often pursue money laundering charges against multiple parties based on evidence uncovered during federal securities fraud investigations. Money laundering charges carry a fine of up to $500,000 or twice the value of the property involved, whichever is greater, and up to 20 years of federal imprisonment.
• Attempt and Conspiracy – Under the federal attempt and conspiracy statute (18 USC Section 1349), any person who “attempts or conspires” to commit securities fraud, “shall be subject to the same penalties as those prescribed for the offense.” In other words, even in cases that do not implicate the attempt provisions of 18 USC Section 1348, prosecutors can still pursue substantial penalties for “unsuccessful” securities-related fraudulent schemes.

Due to the varied and significant risks involved in facing a federal securities fraud investigation, a comprehensive and cohesive defense strategy is essential. Formulating an effective defense strategy starts with engaging a team of highly experienced securities fraud defense lawyers as soon as possible.

Contact the Securities Fraud Defense Lawyers at Oberheiden PC

If you need to speak with an experienced lawyer about a federal securities fraud investigation, we encourage you to contact us immediately. Call 888-680-1745 or contact us online to speak with one of our senior securities fraud defense lawyers as soon as possible.