How Federal Prosecutors and the SEC Penalize Securities Fraud – and What Defendants Need to Know
When facing allegations of securities fraud from the U.S. Department of Justice (DOJ) or U.S. Securities and Exchange Commission (SEC), it is critical to have a clear understanding of the risks involved. In criminal and civil enforcement cases, defendants can face substantial penalties—including penalties that can jeopardize their personal and professional wellbeing for years to come.
What types of penalties are on the table? Here’s what you need to know:
Criminal Penalties for Securities Fraud (DOJ)
The DOJ charges securities fraud under 18 U.S.C. Section 1348. There are two specific securities fraud statutes:
- (1) defrauding any person in connection with any security registered under section 12 of the Securities Exchange Act of 1934 or any security of any issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934; or,
- (2) obtaining, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934.
Both statutes carry the same penalties: “a fine of not more than $5,000,000, or imprisonment of not more than 20 years, or both.” While this might seem straightforward, it is important to understand that the potential criminal penalties in a securities fraud case will depend on a wide range of factors. These factors include (but are not limited to):
- The Number of Counts Involved – The DOJ can charge multiple counts of securities fraud arising from a single alleged scheme or course of conduct. If several counts are charged, the potential fines and term of imprisonment increase proportionally.
- Whether Fines are Pursued Under the Alternative Fines Act – The Alternative Fines Act gives the DOJ the ability to seek a higher fine in some cases. Under the Alternative Fines Act, if the proceeds of the offense or offense are greater than the statutory fine, the DOJ can pursue fines of up to double the amount of the defendant’s gross gain or gross loss to a third party.
- Whether the “Sophisticated Means” Enhancement Applies – Under the Federal Sentencing Guidelines, criminal defendants can face “enhancements” in certain circumstances. In securities fraud cases, the “sophisticated means” enhancement in Section 2B1.1 of the Guidelines is one that frequently comes into play. This enhancement applies to criminal cases in which the alleged fraudulent activity involves “especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.” Depending on the specific facts of the case, this enhancement can add eight, 10, or 12 levels to a defendant’s base offense level.
The Federal Sentencing Guidelines also establish a base offense level for securities fraud, which is a key determinant of a defendant’s exposure in federal district court. Generally, the base offense level for securities fraud is six. However, the Guidelines also establish a loss table that increases the base offense level based on the amount of the “loss” involved. While this loss table is not exclusive, it is a primary focus for DOJ prosecutors and federal district court judges, and it often serves as the key determinant of defendants’ exposure. Here are just a few examples:
- If the loss involved is greater than $15,000, the base offense level increases to eight.
- If the loss involved is greater than $250,000, the base offense level increases to 14.
- If the loss involved is greater than $3,500,000, the base offense level increases to 20.
- If the loss involved is greater than $65,000,000, the base offense level increases to 26.
While many individuals and organizations face securities fraud charges under 18 U.S.C. Section 1348, the DOJ can pursue charges under other statutes as well. Examples include:
Civil Penalties for Securities Fraud (SEC)
The SEC can pursue civil enforcement actions under several provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. These include Section 10(b) and Rule 10b-5, Section 17(a), and Section 206 (of the Exchange Act and Investment Advisers Act, respectively).
To determine the penalties to seek in civil enforcement actions, the SEC applies the same guidelines that federal judges use to determine prison sentences in criminal cases. This means that the potential exposure in a civil enforcement action can be comparable to the potential exposure in a criminal case. However, since civil enforcement actions do not carry the potential for prison time, the consequences of an unfavorable outcome are generally less severe.
This does not mean that facing a civil enforcement action is any less serious than facing criminal charges. In both cases, the risks of an unfavorable outcome can be substantial, and it is imperative to devote the time and resources required to mount a strategic defense. In recent years, the SEC has imposed substantial penalties in civil enforcement actions, including:
- A $200 million settlement with J.P. Morgan for record retention violations, with J.P. Morgan also agreeing to implementation of a comprehensive compliance protocol;
- A $700,000 civil penalty in a case involving alleged fraud related to COVID-19 tests, personal protective equipment (PPE), and vaccines; and,
- A $40 million judgment in an investment fraud case.
Along with imposing fines based on the Federal Sentencing Guidelines, the SEC also imposes disgorgement in securities fraud civil enforcement cases. Disgorgement is a remedy that requires securities fraud defendants to pay all “ill-gotten gains” to the government. This remedy involves the forfeiture of all gains that are traceable to a defendant’s fraudulent acts (and can also include accrued interest in many cases).
The SEC can also impose other penalties in civil enforcement cases. These include, but are not limited to:
- “Cease and desist” orders to continue fraudulent activities
- Industry bars
- Corporate reforms and increased oversight requirements
What To Do When Facing Allegations of Securities Fraud
When facing allegations of securities fraud, the single most important thing you can do is to engage experienced federal defense counsel promptly. Whether you are under investigation by the DOJ or the SEC, you need to implement a comprehensive defense strategy focused on protecting you (and, if applicable, your organization) to the fullest extent possible.
At Spodek Law Group, our legal team has significant experience representing clients in securities fraud investigations and enforcement proceedings. Several of our attorneys are former DOJ prosecutors, and several of our consultants are former high-ranking federal agents. We have successfully defended clients in high-stakes securities fraud cases, and we can apply our experience to help protect you as much as possible.
When facing allegations of securities fraud, the specific defense strategy you should implement depends on the information the DOJ or SEC has in its possession. If possible, proving that you did not engage in fraudulent acts will prove to be the most straightforward approach. If you cannot prove your innocence, then you will need to focus on the specific issues that are most likely to lead to a favorable outcome. For example, if the DOJ is pursuing criminal charges, your defense strategy may need to focus on the loss table under the Federal Sentencing Guidelines, as convincing prosecutors or the judge that a lower amount is involved could significantly reduce your risk of facing substantial penalties.
Regardless of the circumstances at hand, when facing allegations of securities fraud, it is imperative that you take the situation seriously. The consequences of a securities fraud conviction or unfavorable civil enforcement action can be devastating. As a result, you need to engage experienced federal defense counsel to represent you, and you need to work closely with your counsel to build and execute a strategic and proactive defense.
Speak with a Senior Federal Defense Lawyer at Spodek Law Group in Confidence
If you need to know more about the criminal or civil penalties you are facing in a federal securities fraud investigation or enforcement proceeding, we encourage you to contact us promptly. To speak with a senior federal defense lawyer at Spodek Law Group in confidence, call 212-300-5196 or request a complimentary consultation online now.
