Investment Fraud Laws
Investments like stocks, bonds, or other “securities” may offer a useful way of growing wealth. However, they also offer a way for fraudsters to take advantage of unwary investors. Laws like the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act respond to the harm caused by investment fraud. These federal statutes impose fines and years of imprisonment for convictions. Since investment fraud cases often involve sophisticated scenarios and high stakes, someone suspected of this crime should consult an attorney experienced in these cases. In the meantime, they should not talk to police or prosecutors about their circumstances, even if they are confident in their innocence.
Elements of Investment Fraud
What a federal prosecutor must prove to get an investment fraud conviction depends on the statute (or statutes) cited in the indictment. One of the core federal laws in this area is Section 10(b) of the Securities Exchange Act. Codified at 15 U.S. Code Section 78j, it prohibits manipulative or deceptive devices or contrivances that are related to buying or selling securities and violate rules created by the Securities and Exchange Commission. The key SEC rule in this context is Rule 10b-5, which broadly prohibits using any device, scheme, or artifice to defraud. Rule 10b-5 also prohibits false statements of material facts, material omissions, and any other acts that would function as a fraud or deceit on anyone.
Another notable law is Section 17 of the Securities Act. Codified at 15 U.S. Code Section 77q, this applies to the offer or sale of securities. It prohibits conduct such as employing a device, scheme, or artifice to defraud, as well as getting money or property through a false statement of a material fact or a material omission. A prosecutor also can get a conviction by proving that the defendant engaged in a transaction or practice that would function as a fraud or deceit on the purchaser of a security.
A third federal statute that may support an investment fraud charge is 18 U.S. Code Section 1348, enacted as part of the Sarbanes-Oxley Act. This applies to a fraudulent “scheme or artifice” involving a security. More specifically, the statute also targets schemes or artifices to obtain money or property in connection with the purchase or sale of a security. Under Section 1348, the prosecutor must prove that the defendant knowingly executed (or attempted to execute) the scheme or artifice.
States also have enacted laws called “blue sky laws.” These prohibit many of the same forms of investment fraud as those covered by the federal statutes. Sometimes a defendant might face charges under federal and state laws simultaneously.
Example of Investment Fraud
One notorious type of investment fraud is called a “Ponzi scheme.” The perpetrator of a Ponzi scheme solicits investments from the public by promising a high rate of return with minimal risk. However, they do not actually invest the funds but instead use money from new investors to pay off earlier investors, preserving the illusion of returns. Ponzi schemes usually fall apart when the rate of new investors falls to a point at which their “investments” do not go far enough to pay fake “profits” to earlier investors.
Offenses Related to Investment Fraud
Some other offenses that could be charged in situations similar to those supporting investment fraud charges include:
- Forgery: making or using a fake or falsified writing with legal significance
- Perjury: could be charged if someone lies under oath about their actions involving securities
- Bribery: could be charged if someone tries to pay off a government investigator to ignore ongoing fraud
- Wire fraud: various fraudulent schemes perpetrated via phones or computers
These crimes may overlap, allowing a prosecutor to bring multiple charges in some circumstances. This could strengthen their position in plea negotiations or provide them with fallback options if further investigation suggests that they may not be able to prove a particular charge beyond a reasonable doubt.
Defenses to Investment Fraud
Some defense strategies take procedural forms. For example, law enforcement may have seized vital evidence in violation of the defendant’s constitutional rights. The Fourth Amendment imposes restrictions on searches and seizures. If the police did not respect these rules, the defendant can ask the court to suppress (throw out) the evidence seized as a result. This could prevent the prosecution from proving the charge.
Substantive defenses might involve arguing that the defendant did not have a culpable mental state. Perhaps they did not intend to defraud, or they did not know that the information was false or misleading. An honest mistake should not result in a criminal conviction. Or sometimes a defendant might claim that the false statement was not “material,” which means that it would not have influenced investor decisions.
Penalties for Investment Fraud
The Securities Exchange Act, the Securities Act, and the Sarbanes-Oxley Act each imposes different terms of imprisonment. A conviction under the Securities Exchange Act may result in up to 20 years, while a conviction under the Sarbanes-Oxley Act carries up to 25 years. A conviction under the Securities Act carries a much shorter maximum term of five years.
Fines under these statutes also vary. A Securities Exchange Act violation carries a maximum fine of $5 million, while a Sarbanes-Oxley Act violation may result in a fine of up to $250,000 or potentially a fine based on the financial gain that anyone received or the financial loss that a victim suffered. (18 U.S. Code Section 3571 explains how fines such as those under the Sarbanes-Oxley Act are calculated.) On the other hand, the maximum fine for a Securities Act violation is only $10,000.
A defendant also may face separate penalties under any state laws that they may have violated. For example, most violations of the Pennsylvania Securities Act carry up to seven years of imprisonment. The maximum fine may be either $250,000 or $500,000, depending on the amount of money or securities involved. Meanwhile, the Arizona statute prohibiting fraud in the purchase or sale of securities makes this crime a Class 4 felony. This generally carries 1.5-3 years of imprisonment, with a presumptive term of 2.5 years.
