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What Is Securities Fraud?

Securities fraud, also referred to as investment fraud, occurs when, for the purposes of financial gain, a financial services person or company pressures or misleads an investor into investing more than they might not otherwise invest. It could also occur if the financial services person breaches the fiduciary duty by not handling the investor’s accounts and investments as instructed. Securities fraud is a category of white collar crime spanning a variety of particular offenses, from Ponzi or pyramid schemes to pump and dump practices.

Other examples include:

  • Offering intentionally misleading financial advice
  • Lying about remuneration in exchange for investment into a particular company or enterprise
  • Insider trading

The investment industry is regulated by the Security and Exchanges Commission, and the Financial Industry Regulatory Authority administers a dispute resolution forum for investors and advisers.

Securities fraud is punishable by criminal and civil penalties, including imprisonment and fines.

Elements of Securities Fraud

The fundamental elements necessary to prosecute a securities fraud case, civil or criminal, are similar to more general acts of fraud.

Making a false statement or material omission of fact is the first element of culpability with civil securities fraud. Further, you must have made this statement or omission of fact with full knowledge. The plaintiff must have acted upon this information, and acting upon the information was harmed or injured as a result.

In criminal securities fraud cases, even an attempted fraud where the plan was never carried out (and thus never harmed anyone) can be prosecuted.

Civil Securities Fraud vs. Criminal Securities Fraud

The primary distinction between a civil securities fraud case and a criminal securities fraud case is that in the former instance, the damage has to actually have been done to the defendant in order for the case to proceed.

Criminal security fraud cases are also brought by government prosecutors (federal, state or municipal) where civil fraud cases are usually prosecuted by private citizens or institutions.

Finally, the two categories of securities fraud can also carry different punishments if you are convicted of the crime. Civil cases usually focus more on financial restitution, while criminal cases generally aim at prison sentences in addition to fines.

What Is the Penalty for Securities Fraud?

Securities fraud can be prosecuted at several levels. At the federal level, if you are found guilty of securities fraud, you could face up to 25 years jail time for a Class C felony. Additionally, all money or assets involved in the fraud are typically confiscated by court order. Probation and hefty fines are possible if you are found guilty of securities fraud at the federal level. The average sentence for federal securities fraud, however, rests at around two years imprisonment.

Securities fraud can be treated as either a misdemeanor or as a felony at the state level, depending upon the jurisdiction. In New York, for example, a misdemeanor securities fraud conviction can result in up to one year in jail, while a felony securities fraud conviction can see the offender off to prison for up to four years.

State-level punishments are typically less severe than if you are convicted in federal court. Generally speaking, individuals convicted of misdemeanor securities fraud at the state level could spend less than two years in jail in addition to fines, while those convicted of felony securities fraud are likely to the penalized with no more than five years imprisonment.

Does the FBI Investigate Securities Fraud?

The FBI does take an active approach in investigating serious cases of potential securities fraud. Beneath the broader umbrella of their White Collar Crime (WCC) Program, the FBI uses a number of investigative techniques to secure evidence for a federal conviction in response to criminal securities fraud.

The SEC may also conduct a parallel investigation, and often gets involved in high-profile civil securities fraud cases.

Securities Fraud vs. Wire Fraud

Securities fraud and wire fraud are not necessarily mutually exclusive. Most commodity trading takes place via the internet, which means prosecutors who have a difficult time proving a securities fraud case may rely instead on a wire fraud charge to get the ball rolling.

While wire fraud is thought of as a “catch-all” charge, it is frequently used when an initial fraud investigation is halted in place or unable to build a case strong enough to justify a more expansive probe of the alleged violations.

Securities Fraud Attorneys

If you are being investigated for securities fraud or you have been charged with violations, you may need to consult an attorney experienced in securities law who can:

  • Advise you on the specifics of the charges against you
  • Devise a legal defense strategy for your case
  • Mount challenges to the enforced disgorgement of your accounts and other property
  • File motions to have the charges dismissed or reduced
  • Negotiate an agreement for you to make restitution
  • Represent you at disciplinary proceedings before FINRA or the SEC
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