The Ultimate Guide to the Federal Securities Fraud Statute

Federal securities laws allow for both civil and criminal prosecution of entities and individuals suspected of defrauding investors. While there are several laws that regulate the securities industry (alongside the SEC’s and FINRA’s Rules), there is one primary federal statute that applies in criminal cases. This is the federal securities fraud statute, 18 U.S.C. Section 1348.

Similar to other federal white-collar criminal statutes, the federal securities fraud statute allows for prosecution in a wide range of circumstances. While well-known forms of fraud such as insider trading and Ponzi schemes can lead to criminal prosecution under the statute, the U.S. Department of Justice (DOJ) can prosecute for numerous other fraud-related offenses as well. Due to the statute’s breadth, almost any fraud scheme involving the offering or sale of securities can trigger prosecution; and, regardless of the specific allegations involved, the maximum penalties under the statute remain the same.

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The Federal Securities Fraud Statute (18 U.S.C. Section 1348): An Overview

The federal securities fraud statute appears in Title 18 of the United States Code. Title 18 defines acts and omissions that are prosecutable as federal crimes, and it establishes the sentencing ranges for these offenses (with sentencing ultimately determined in accordance with the Federal Sentencing Guidelines).

Section 1348 of Title 18 is the federal securities fraud statute. Under 18 U.S.C. Section 1348, the DOJ can pursue criminal charges for two separate offenses: (i) fraud involving registered securities; and, (ii) obtaining money or property by false pretenses.

1. Fraud Involving Registered Securities

We’ll start our discussion of the federal securities fraud statute with an overview of 18 U.S.C. Section 1348(1). This section of the statute states, in full:

“Whoever knowingly executes, or attempts to execute, a scheme or artifice—(1) to 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 with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) . . . shall be fined under this title, or imprisoned not more than 25 years, or both.”

For individuals targeted in federal securities fraud investigations, owners and executives of targeted companies and firms, and their defense counsel, there are several critical elements of Section 1348(1) to understand. To secure a conviction in federal district court, the DOJ must be able to prove each of these elements beyond a reasonable doubt. If the DOJ’s evidence of any element is lacking, then a conviction under the statute is unwarranted. The key elements of a federal securities fraud charge under Section 1348(1) are:

• Knowingly Executes, or Attempts to Execute – Under 18 U.S.C. Section 1348(1), targeted individuals and entities can face prosecution for either knowingly executing or knowingly attempting to execute a securities fraud scheme. This latter point is critical, as a “successful” fraud is not necessary to justify prosecution under the statute. Multiple individuals can be implicated in the execution or attempted execution of a securities fraud scheme, and it is not unusual for the DOJ to target multiple individuals at various companies and firms in large-scale securities fraud investigations. With that said, investigations targeting individual brokers, advisors, and executives are common as well, and these investigations can also present substantial risks for those involved.
• A Scheme or Artifice to Defraud – Securities fraud charges under 18 U.S.C. Section 1348(1) require evidence of a scheme or artifice to defraud. As referenced above, this scheme or artifice can take many different forms, from engaging in insider trading to making material misrepresentations to prospective investors. “Scheme” and “artifice” are not well-defined in federal jurisprudence, but instead are intentionally left broad to allow for prosecution in a wide range of scenarios.
• In Connection with Any Future, Option, or Security – Section 1348(1) covers fraudulent schemes involving commodity futures, options, and securities. While the vast majority of prosecutions under the statute focus on the fraudulent promotion, issuance, and sale of stocks and other securities, the DOJ works alongside the U.S. Securities and Exchange Commission (SEC), U.S. Commodity Futures Trading Commission (CFTC), and its other law enforcement partners to target all types of fraudulent schemes that cause harm (or have the potential to cause harm) to investors.
• Of an Issuer with a Class of Registered Securities or that is Required to File Reports – In cases involving securities, 18 U.S.C. Section 1348(1) applies specifically to securities that are issued by either: (i) a registered investment company (i.e., a publicly traded company); or, (ii) a company that is required to file reports with the SEC (i.e., companies that qualify for registration exemptions).

2. Obtaining Money or Property By False Pretenses

Next, we’ll examine 18 U.S.C. Section 1348(2). Under this section of the federal securities fraud statute:

“Whoever knowingly executes, or attempts to execute, a scheme or artifice . . . (2) 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 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) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); . . . shall be fined under this title, or imprisoned not more than 25 years, or both.”

This section of the federal securities fraud statute expands the statute’s scope to allow for prosecution of brokerage firms, advisory firms, individual brokers and advisors, and other entities and individuals in situations not covered under Section 1348(1). Crucially, however, both sections of the statute employ the same “knowingly” standard for criminal culpability. This means that if the DOJ cannot prove that a target knowingly engaged in a scheme or artifice to fraudulently obtain money or property in connection with the sale of a security, this alone can be enough to avoid a conviction and sentencing at trial.

Acts and Omissions Prohibited Under the Federal Securities Fraud Statute

While the federal securities fraud statute contains broad prohibitory language, this structure allows the DOJ to pursue charges for an extremely wide variety of specific criminal offenses. Almost any fraudulent act involving the promotion, offer, or sale of a security has the potential to implicate either Section 1348(1) or Section 1348(2), so the DOJ can—and does—use the statute to prosecute individuals and entities under numerous different circumstances. Some examples of acts and omissions that can be prosecuted under the federal securities fraud statute include:

• Selling unregistered securities
• Conducting unregistered initial public offerings (IPOs)
• Filing SEC reports with material misstatements or omissions
• Making false representations in prospectuses, in marketing materials, in websites, and on social media
• Engaging in insider trading
• Executing pyramid schemes, Ponzi schemes, and other fraudulent schemes targeting retail investors
• Making false or misleading disclosures to brokerage and advisory firm clients

Again, these are just examples. When targeted in a securities fraud investigation, it is imperative that targets engage experienced defense counsel as soon as possible. As securities fraud investigations can lead to charges for mail fraud, wire fraud, money laundering, and other federal crimes as well, targets should focus on choosing a defense firm that handles all types of federal white-collar cases.

Penalties Under the Federal Securities Fraud Statute

As noted above, the maximum penalties under the federal securities fraud statute are the same regardless of the specific allegations involved. For individuals, prosecution under 18 U.S.C. Section 1348(1) or Section 1348(2) can result in up to a $250,000 fine and 25 years of federal imprisonment. For companies and firms, prosecution can result in up to a $500,000 fine. However, this will often be in addition to the potential maximum penalties for mail fraud, wire fraud, money laundering, and other federal crimes.

Responding to a Criminal Securities Fraud Investigation Under 18 U.S.C. Section 1348

In all cases, responding to a criminal securities fraud investigation under 18 U.S.C. Section 1348 requires a proactive and strategic approach. From responding to search warrants and subpoenas to communicating with federal agents and prosecutors, all aspects of a target’s response must be coordinated and focused on achieving a specific desirable outcome. The DOJ aggressively pursues charges in cases involving allegations of causing financial harm to investors; and, to overcome the DOJ’s prosecutorial tactics, targeted individuals and entities must be prepared to defend themselves by all means available.

Contact the Federal Securities Fraud Defense Lawyers at Oberheiden P.C.

If you need to know more about defending against criminal allegations under the federal securities fraud statute, we encourage you to contact us promptly. We have extensive experience representing individuals and entities in high-stakes DOJ, SEC, and CFTC matters. To arrange a confidential consultation with a senior federal securities fraud defense lawyer at Oberheiden P.C., please call 888-680-1745 or inquire online today.