By Criminal Defense Lawyer Jeremy Rosenthal
Securities fraud has to do with false claims, statements and the inducement of investments in things such as stocks and bonds which then result in loss. Often times with security fraud there are also claims of issues with improper or absence of appropriate licensing.
What is a Security?
Securities can be confusing and there are different types. A security is defined generally as a right to own or trade an interest – typically something like a stock, bond or derivative. The lynchpin of what makes something a security versus simply an investment is with a security, your interest is passive. In other words, your ownership gives you limited rights and ability to control how the business is run unlike if you were to enter into a partnership for a business or for real estate.
Today we’re not talking about security as in collateral such as a house or car. That, too can trigger criminal prosecution but that’s another topic.
Types of Criminal Prosecutions Involving Securities
Federal and State authorities both prosecute securities fraud. The Security and Exchange Commission (“SEC”) is the federal enforcement agency and in Texas, we have the State Securities Board which has a prosecutorial team. You can read generally about the differences between state and federal prosecutions here. The SEC and State Securities Board may also sue civilly instead of or in addition to criminal prosecution.
Securities fraud happens where someone sells stock or interests in something via fraud. In those types of prosecutions there is normally a business venture which goes belly-up. Later, many of the investors complain the statements made to sell them the stock were false. Perhaps they claim they were guaranteed profits. Perhaps they claim the investment was based on a non-existent or highly speculative innovation or invention. The accusers may claim they were otherwise lied to, intimidated, or defrauded into making the investment.
Several issues come to mind in defending securities fraud charges.
First – what types of admonishments, disclosures and warnings were given to investors — and just as importantly – can those warnings be proven? How prominent were the admonishments relative to everything else?
Second – just because a project failed doesn’t mean it was fraudulent. Projects and investments fail. The type of project or business venture needs to be re-examined to see if it failed for other reasons such as poor management, a bad economy, better competitors, etc. The project also needs to be re-constructed based on it’s over-all viability and how realistic it was in the first place? Was it based on impossible science such as a machine which makes water flow uphill? Or, was it based on wishful thinking like a speculative product?
Third – Even if one person associated with a venture was fibbing and defrauding folks that doesn’t mean everyone else on the project was too. Were the folks making the fraudulent statements executives and directors or were they sweeping the floors?
Selling Securities Without a License
FINRA, or the Financial Industry Regulation Authority is an independent agency which handles licensing while the SEC is the actual federal arm charged with enforcement. FINRA issues what is known generally as a Series 7 license common in the securities industry.
A person needs to be licensed to sell securities. You can read a detailed list of SEC regulations on that here. Texas State Securities Board has information on dealers and advisors here.
Selling securities without a license commonly accompany charges of securities fraud.
Penalties for Securities Fraud
Penalties for both State and Federal securities fraud typically depend on the amount alleged to have been lost. Those amounts can often be aggregated. So the range of potential jail varies widely in any given case but in both State and Federal Court, Securities Fraud is a felony.
*Jeremy Rosenthal is board certified in criminal law by the Texas Board of Legal Specialization. He is recognized as a Texas Super Lawyer by Thomson Reuters.