Securities Fraud 101
“Securities” is the general category that stocks and bonds fall under. So, securities fraud ends up being charged any time someone is accused of committing fraud that relates to stocks or bonds. This often happens when someone makes a misleading or outright false claim about the value of a company in order to convince someone to make a financial decision based on that false information. There are federal and state laws relating to securities fraud, and since the cases often cause people to lose significant amounts of money, it can lead to civil cases on top of the criminal charges.
On a federal level, the United States Securities and Exchange Commission is tasked with enforcing securities laws, and states have their own branches of a similar commission that handle securities cases at the state level. Typically, securities fraud is monitored by what is called the “Securities Division,” which falls under the oversight of the state’s Corporation Commission. The Securities Division writes that its mission is to “strive to preserve the integrity of the financial marketplace through investigative actions as well as the registration and oversight of securities, securities dealers and salesperson, and investment advisers and their representatives; to enhance legitimate capital formation and deter financial fraud; and to minimize the burden and expense of regulatory compliance by legitimate business.” Essentially, it is up to the Securities Division to recognize securities fraud and stamp it out.
The law prohibiting securities fraud writes that is illegal to do the following in relation to the sale or purchase of securities: employ any scheme or device to defraud; make a false statement of material fact or omit a material fact; or engage in any transaction, practice or course of business that operates as a fraud or deceit.
There are some types of securities fraud that occur commonly. The first we will look at is called “reliance.” This is when a stock broker somehow misrepresents an investment to the person that has hired them to invest their money. These cases require someone to have been working directly with a broker who misrepresents the investments directly to them. In cases where the transaction happens through portfolio arrangements, it is not a case of reliance though it may still be securities fraud. Additionally, in some cases the investor may be somehow responsible for their own situation. The Private Securities Litigation Reform Act allows stock brokers to be able to avoid securities fraud charges if they are able to prove that the investor themself was the one who caused harm to their own investment.
Someone who did not directly orchestrate securities fraud can still be charged with the crime. Under the Securities Act, it states that someone can participate in fraud without actually being the broker who did the fraudulent buying or selling of stocks and bonds. This means that anyone who contributed to the fraud knowingly or recklessly will also be culpable for securities fraud. Someone may not buy the stock themself, but work with a fraudulent broker and be responsible for misleading an investor. The law makes it so that not only the direct buyers and sellers of stock are culpable, but also people who encourage, induce, or participate in a fraudulent sale.
Stock brokers have obligations based on their licenses. These mean that they are obligated to invest based on specific needs for each person they take on as a client. Some of these classifications might include: financial status; age; the goals someone has in investing; what their attitude toward risk is; whether they require liquid investments; their tax status; or their experience with investing. Stock brokers are also required to: disclose risks and fees; offer products that are approved by their firm; and consider the interests of their client before their own. If you are a stock broker and under investigation, you should seek out the help of a skilled attorney.
Outside of the sale of stocks and bonds, there are a few other examples of securities. The main type is called Commodities Trading Fraud and happens when someone is trading physical commodities as opposed to stocks. Fraudulent trading as it pertains to commodities would include: trading a commodity without getting consent from its owner; misrepresenting information to a potential buyer; withholding information from an investor; or misappropriating or embezzling investor funds for outside purposes.
Securities fraud cases carry many penalties, as they can come up in both criminal and civil court. The crime is typically charged as a class 4 felony. If convicted, a defendant will face prison time of between 1.5 and 3.75 years. While felonies usually carry fines, the ones associated with securities fraud tend to be much larger than other felonies. Because securities fraud involves mishandling or misrepresenting stocks in order to turn a profit, the fines can end up ranging up to millions of dollars, especially if a civil court requires a defendant to pay damages to the victims. A defendant can be prosecuted on a state and federal level at the same time for these crimes as well. On top of this, a defendant will lose their license to serve as a broker and will no longer be able to trade securities after they are convicted.