Securities Fraud: Sentencing and Penalties

Securities fraud is a crime that typically involves complicated facts and extensive government investigations, and one that can lead to lengthy jail sentences and stiff fines if you are convicted.

What Is Securities Fraud?

The term "security" is a broad term that includes numerous types of investments, such as municipal bonds, corporate stocks, bank notes, investment contracts, and more. Securities fraud occurs when someone involved with one of these investments lies, cheats, or steals in an attempt to gain a financial advantage. Securities fraud is considered a white-collar crime, and it encompasses activities committed by private individuals, as well as by professional financial analysts, securities brokers, corporations, and even government agencies.

State and Federal Laws on Securities Fraud

The federal government, through the Securities and Exchange Commission (SEC), is the primary governmental authority responsible for prosecuting securities fraud. However, each state also has its own laws about securities fraud and its own state securities commission. While any securities fraud crime might be punishable under either state or federal law, they are often prosecuted as federal crimes.

The two main federal laws—the Securities Act of 1933 and the Securities Exchange Act of 1934—are the primary federal laws under which securities fraud cases are prosecuted, though some numerous related laws and regulations also apply.

(15 U.S.C. §§ 77q, 77t, 77x, 78j, 78ff.)

Types of Securities Fraud

Securities fraud can arise when a company or organization issues a stock or other security, as well as when someone involved in the buying, selling, or trading of a security acts fraudulently.

Securities fraud can occur in multiple ways, though some types of fraud are more common than others. It's important to note that you can commit securities fraud even if you never actually profit from the activity. If you engage in fraudulent activity with the intent to profit or benefit from it, this is enough to commit the crime.

Misrepresentations on Stocks and Securities

At the simplest level, making a profit in securities depends on knowing the current value of a security and making a judgment on what its value will be in the future. With knowledge of what a security's value will be, a trader can then make an investment designed to profit from that future value. In some situations, a person can attempt to manipulate a security's value by making a deceptive statement or misrepresentation. For example, a broker who knowingly makes a false statement about a company on social media, in order to profit from the anticipated effect on the stock, has committed securities fraud.

Insider Trading

A person who is associated with a company and knows information that isn't available to the public, who tries to make a profit by buying or selling a security, commits the offense of insider trading in many situations. While some insider trading is legal, such as when a person in a corporation buys or sells the company's stock and properly reports the activity to securities regulators, other forms of insider trading are not.

For example, if you work for a company and learn a secret that, once revealed, would change the price of the company's stock, you cannot legally use that information to trade securities. If you choose to make a trade using that information, you are guilty of securities fraud. If you tell a friend about the information and the friend makes a trade, the friend is guilty of securities fraud as well.

Churning (Excessive Trades)

Churning describes the practice of a securities broker who convinces a client to engage in excessive trades, intending to generate more fees or commissions for the broker. Brokers are fiduciaries, meaning they have a legal duty to do what is in the client's best interests and not to benefit the broker's interests. When a broker engages in churning, he or she fails to keep the client's best interests in mind and, instead, makes trades only to benefit the broker or the brokerage.

What Are the Penalties for Securities Fraud?

A conviction for securities fraud can involve significant penalties for anyone involved. Securities fraud can be punished both with civil penalties, such as fines or license restriction, as well as criminal penalties, such as fines and prison.

Fines. Securities fraud can involve very high fines, though the amount of fine will depend upon the circumstances of the case. In some situations, such as in cases of insider trading, fines of up to $5 million are possible, while fines for other types of securities fraud can be $10,000 or more.

Incarceration. A conviction for securities fraud can also result in a prison sentence. Any conviction for a federal securities fraud crime can result in a five-year federal prison sentence per offense. Certain acts carry up to 20 years of federal prison time.

Probation. Probation is also a possible penalty for securities fraud, especially when there is only a single instance of fraud or it involves offenses that didn't result in any financial loss. Probation usually lasts several years, though terms of five years or more are possible. While on probation, the probationer must regularly meet with a probation monitor and comply with any conditions imposed by the court, such as not committing more crimes, submitting to drug testing, and paying all fines and restitution.

Restitution. Because securities fraud often involves investors, employees, clients, or others who suffer monetary loss as a result of the fraud, courts make restitution part of the sentence. When ordered to pay restitution, a person convicted of securities fraud must repay the money lost as a result of the fraudulent activity. The restitution must be paid in addition to any fines.

Speak to a Lawyer

Anytime you're facing a securities fraud charge, or are being investigated for this crime, you need to speak to a criminal defense attorney in your area as soon as possible, and always before you make any statements to the police or investigators. An experienced securities fraud defense attorney will be able to evaluate any case against you and provide you with legal advice based on the law and knowledge of the prosecutors, courts, and complicated regulations surrounding securities transactions.