What Is Securities Fraud
What Is Securities Fraud
SEC investigators and FBI agents are asking about stock trades you made, information you shared with investors, disclosures in financial statements, or transactions prosecutors claim were securities fraud. You’re charged with violations of federal securities laws under 15 U.S.C. § 78j(b) and SEC Rule 10b-5, or criminal securities fraud under 18 U.S.C. § 1348. Securities fraud criminalizes schemes to defraud investors or manipulate securities markets through misrepresentations, omissions of material facts, or deceptive practices. It covers insider trading, market manipulation, fraudulent financial statements, Ponzi schemes involving securities, and false statements to investors. Securities fraud carries twenty-five years maximum under criminal statutes, plus civil penalties, disgorgement of profits, and SEC enforcement actions that bar you from serving as officer or director of public companies.
Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, who has defended securities fraud cases for many, many years. We’ve represented clients accused of insider trading, charged with fraudulent financial statements, investigated for market manipulation. Securities fraud prosecutions target everything from corporate executives cooking books to individual traders making questionable transactions. Understanding what constitutes material misrepresentation and what intent prosecutors must prove determines whether your conduct was securities fraud or aggressive business practice within legal boundaries.
Types of Securities Fraud
Insider trading involves buying or selling securities based on material nonpublic information in breach of fiduciary duty. Corporate insiders, tippees who receive inside information, hackers who steal confidential information – all can be charged with insider trading if they trade or tip others to trade on material nonpublic information. Market manipulation includes pump-and-dump schemes where fraudsters artificially inflate stock prices then sell at profit, painting the tape to create false appearance of trading activity, spreading false rumors to affect stock prices. Financial statement fraud involves falsifying company financial records, overstating revenue, understating liabilities, or making misleading disclosures in SEC filings.
Ponzi schemes and investment fraud promise returns that don’t exist, use new investor money to pay earlier investors, and eventually collapse when new investment stops. Broker-dealer fraud includes churning (excessive trading to generate commissions), unsuitable recommendations, unauthorized trading, or misappropriating customer funds. Offering fraud involves selling unregistered securities, making false statements in private placement memorandums, or conducting unregistered broker-dealer activity.
Elements of Securities Fraud
Securities fraud under Rule 10b-5 and 18 U.S.C. § 1348 requires: use of interstate commerce or mail in connection with purchase or sale of securities, material misrepresentation or omission of material fact, scienter (intent to deceive or reckless disregard for truth), reliance by victim on misrepresentation, loss causation. Materiality means information a reasonable investor would consider important in making investment decision. Missing quarterly earnings, undisclosed related-party transactions, CEO departure – material. Minor accounting adjustments, public information already disclosed – not material.
Scienter requires proof you acted with intent to deceive or with extreme recklessness. Mere negligence isn’t enough for criminal securities fraud. Prosecutors prove scienter through emails showing knowledge of false information, insider trading patterns showing exploitation of nonpublic information, or deliberate concealment of material facts from investors. Sophisticated accounting fraud with false documentation and destroyed records shows scienter. Honest business judgment that turned out wrong doesn’t.
Insider Trading Prosecution
Insider trading prosecutions target corporate insiders (executives, board members, employees), tippees (friends, family, business associates who receive tips), and hackers or misappropriators who steal confidential information. The SEC monitors unusual trading patterns before major corporate announcements, analyzes trading by executives and their associates, and investigates tips about suspicious trading. Prosecutors prove insider trading through evidence of access to material nonpublic information, trading patterns inconsistent with normal behavior, communications showing information sharing, and sudden unusual trades before public announcements.
Defenses to insider trading include lack of material nonpublic information – the information was public or immaterial when you traded. Pre-planned trading under Rule 10b5-1 trading plans established before learning inside information provides safe harbor. Lack of awareness of information’s materiality or nonpublic nature. No breach of duty – you didn’t owe fiduciary duty to source of information or to corporation. But prosecutors aggressively pursue even tenuous insider trading theories, charging peripheral players who received fourth-hand tips or traded on information they claim should have been recognized as insider knowledge.
Penalties for Securities Fraud
Criminal securities fraud under 18 U.S.C. § 1348 carries twenty-five years maximum. Wire fraud charges (often added to securities cases) carry twenty years. Conspiracy charges add additional counts. Sentencing guidelines base calculations on loss amount – intended loss includes full amount investors invested or would have invested based on fraud, not just their net losses. A Ponzi scheme that raised $50 million calculates loss as $50 million even if victims ultimately recovered $30 million. Insider trading loss calculations use either gain to defendant or loss to person from whom you purchased (whichever is greater), often resulting in inflated loss amounts for sentencing.
SEC civil enforcement actions seek disgorgement (repayment of all profits from fraud), civil penalties (up to three times profits for insider trading), and injunctions barring future violations. Officer-and-director bars prohibit serving as executive or board member of public companies. Criminal restitution orders require paying back investor losses. Collateral consequences include professional license revocations, inability to work in financial industry, and reputational destruction that ends careers.
Why Federal Prosecutors Prioritize Securities Fraud
Securities fraud prosecutions increased after financial crisis, Enron, Bernie Madoff, and other high-profile cases. The SEC and FBI’s securities fraud units actively investigate trading patterns, financial statement irregularities, and investor complaints. Insider trading prosecutions receive media attention and serve deterrent purposes – prosecuting high-profile executives sends message that securities laws will be enforced. Market manipulation and accounting fraud cases target systemic threats to market integrity.
Prosecutors use securities fraud charges against conduct that might be handled civilly in other contexts. Aggressive revenue recognition that pushes boundaries – securities fraud. Optimistic projections that don’t materialize – securities fraud if you knew they were unrealistic. Trading on information you thought was public but prosecutor claims was inside information – insider trading. The bright-line rules that exist in other criminal statutes don’t exist in securities fraud – prosecutors have enormous discretion to interpret aggressive business practices as criminal fraud.
Todd Spodek has defended securities fraud cases throughout his career – SDNY, EDNY, federal courts nationwide. We’ve represented clients in insider trading investigations, financial statement fraud cases, and Ponzi scheme prosecutions. When you’re under investigation for securities fraud, call 212-300-5196.
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