When the FBI Comes Calling…®
SECURITIES FRAUD
Securities Fraud is much like other forms of white collar fraud in that the objective is to accomplish a desired result through deception, trickery, concealment, and/or dishonesty.
Business or corporate fraud is a financial crime and has been statutorily regulated since May 27, 1933. Violations of federal law under today's applicable statutes include such acts as: 1) insider trading, 2) buying or selling securities not registered with the Securities and Exchange Commission (SEC), 3) willfully making false statements or omissions of fact in documents filed with the SEC, and/or 4) engaging in interstate communications with prospective purchasers of securities, where such communications employ any device, scheme, or artifice to defraud, or contain false statements or omissions of fact calculated to mislead.
15 U.S.C. § 77q (2005)
The Crime
It is a violation of section 77q for any person in the offer or sale of any securities or any security-based swap agreement (as defined in 15 U.S.C. § 78c ) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly-
- to employ any device, scheme, or artifice to defraud, 15 U.S.C. § 77q(a)(1), or
- to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; id. § 77q(a)(2) or
- to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Id. § 77q(a)(3).
Case Law Interpreting Section 77q
The "purpose of the Securities Act … is to protect the investor. To that end a heavy responsibility is placed upon a person engaging in the securities business. He must truthfully and without reservation inform the investor of all factors material to the security which he offers. It is no defense to an action for injunction, as appellants urge, that the admittedly false statements were uttered without knowledge or that there was no intention to omit the disclosure of material facts." Securities & Exchange Com. v. Van Horn, 371 F.2d 181, 186 (7th Cir. 1966). To establish a violation of section 77q, the SEC must prove the following elements: (1) a material misrepresentation, (2) in connection with the purchase or sale of a security, (3) scienter, and (4) use of the jurisdictional means. SEC v. C. Jones & Co., 312 F. Supp. 2d 1375, 1379 (D. Colo. 2004).
15 U.S.C. § 78i (2005)
The Crime
In general, section 78i proscribes engaging in behavior that would manipulate the prices of securities. For the purposes of this analysis, only a couple of provisions are considered.
It is a violation of section 78i for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange-
- For the purpose of creating a false or misleading appearance of active trading in any security registered on a national securities exchange, or a false or misleading appearance with respect to the market for any such security,
- (A) to effect any transaction in such security which involves no change in the beneficial ownership thereof, or
- (B) to enter an order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or
- (C) to enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same size, at substantially the same time, and at substantially the same price, for the purchase of such security, has been or will be entered by or for the same or different parties. 15 U.S.C. § 78i(a)(1)
- To effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement (as defined in 15 U.S.C. § 78c ) with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security,
- for the purpose of inducing the purchase or sale of such security by others. Id. § 78i(a)(2).
Case Law Interpreting Section 78i
The purpose of the statute is to prevent rigging of the market and to permit operation of the natural law of supply and demand. United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972).
15 U.S.C. § 78j (2005)
For more information on section 78j, please visit our accounting fraud page.In most federal jurisdictions, to be convicted of securities fraud, an Assistant United States Attorney (AUSA) must present evidence that when submitted to a jury or judge would prove beyond a reasonable doubt:
- That the defendant used a device or scheme to defraud someone, made an untrue statement of a material fact, or failed to disclose a material fact which resulted in making the defendant's statements misleading;
- that the defendant's acts were, or failure to disclose was, in connection with the purchase or sale of securities;
- that the defendant used the mail or telephone in connection with these acts or this failure to disclose; and
- that the defendant acted for the purpose of defrauding buyers or sellers of securities.
The Punishment
Any person who willfully violates any of the securities laws in section 77a et seq., can be punished by
- a fine of not more than $10,000,
- imprisoned for not more than five years, or
- both. 15 U.S.C. § 77x.
- a fine of not more than $5,000,000 ($25,000,000 if a corporation),
- imprisoned for not more than 20 years, or
- both. 15 U.S.C. § 78ff.
As can be clearly seen from section 1961, the list of affiliated activities is quite large and many organizations and individuals can easily find themselves subject to the stiff penalties and sanctions afforded under RICO. As a preliminary matter, it should be noted that, while the Act refers to "Criminal Organizations," membership in organized crime is not a necessary element of a RICO conviction. United States v. Uni Oil, Inc. 646 F.2d 946, 953 (5th Cir. 1981).
In order to secure a conviction under the RICO Act, the government must prove both the existence of an "enterprise," and a connected "pattern of racketeering activity." United States v. Turkette, 452 U.S. 576, 583 (1981). An enterprise is an entity, and it can be proved by evidence of an ongoing organization, and by evidence that the carious associates function as a continuing unit. Id. The pattern of racketeering activity is a series of criminal acts, which can be proved by evidence of the requisite number of acts of racketeering committed by the participants in the enterprise. Id. Proof of one, however, does not necessarily prove the other. Id. Furthermore. Racketeering enterprises or racketeering predicate acts do not need to be accompanied by an underlying economic motive. NOW v. Scheidler, 510 U.S. 249, 259, 261 (1994).
To clarify how each of the three subsections of section 1962 operate, the case Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406 (3rd Cir. 1991) is informative. Under section 1962(a), the plaintiff (or government) must allege an injury specifically from the use or investment of income in the named enterprise; under section 1962(b) the plaintiff (or government) must allege a specific nexus between control of a named enterprise and the alleged racketeering activity; and while section 1962(c) is not subject to these nexus limitations, cases brought under section 1962(c) cannot allege that an entity is both an enterprise and a defendant. Kehr at 1411.
In establishing a pattern of racketeering activity, the prosecutor must show that racketeering predicates are related and that they amount to or pose a threat of continued criminal activity. H.J., Inc. v. Northwestern Bell Tel, Co. 492 U.S. 229, 240 (1989). This may be done in a variety of ways. Id. at 241. "A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few week or months and threatening no future criminal conduct do not satisfy this requirement." Id. at 242. Congress, apparently, "was concerned in RICO with longterm criminal conduct." Id. If continuity cannot be established by showing longterm activity, "liability depends on whether the threat of continuity is demonstrated." Id. (emph. in original). Because "threat of continuity" depends on the specific facts of each case, it can be sufficiently established "where the predicates can be attributed to a defendant operating as part of a long-term association that exists for criminal purposes." Id. at 242-43. The continuity requirement can also be satisfied by showing "that the predicates are a regular way of conducting defendant's ongoing legitimate business (in the sense that it is not a business that exists for criminal purposes), or of conducting or participating in an ongoing and legitimate RICO 'enterprise.'" Id. at 243.
Defining an "enterprise" is therefore important. An enterprise can technically exist with only one actor to conduct it, even though it will, in most situations, be conducted by more than one person or entity. Salinas v. United States, 522 U.S. 52, 65 (1997) (dicta). The existence of a RICO enterprise is shown where
- there is an ongoing organization with a decision-making framework for controlling a group that remains unchanged over time
- various associates function as continuing unit, and
- enterprise is separate and apart from the pattern of racketeering activity. United States v. Sanders, 928 F.2d 940, 943 (10th Cir. 1991).