Securities Fraud

Securities Fraud

Statute:	15 U.S.C. § 78j / 18 U.S.C. § 1348
U.S. Code:	Title 15, Chapter 2B / Title 18, Chapter 63
Max Prison:	20 years (§ 78j) / 25 years (§ 1348)
Max Fine:	$5,000,000 (individuals) / $25,000,000 (organizations)
Guidelines:	USSG §2B1.1
Base Level:	7
Agencies:	SEC, FBI, DOJ Fraud Section
Related:	Wire Fraud, Mail Fraud, Money Laundering

Securities fraud encompasses a range of federal crimes involving deceptive practices in connection with the purchase or sale of securities. The primary statutes are Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j) and its implementing Rule 10b-5, as well as 18 U.S.C. § 1348, which provides criminal penalties for securities and commodities fraud.

Securities fraud under Section 10(b) carries a maximum sentence of 20 years imprisonment, while the broader securities and commodities fraud statute under 18 U.S.C. § 1348 carries a maximum of 25 years. Fines can reach $5 million for individuals and $25 million for organizations.

Statutory Framework

Section 10(b) and Rule 10b-5

Section 10(b) of the Securities Exchange Act of 1934 prohibits the use of any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security. SEC Rule 10b-5, promulgated under Section 10(b), makes it unlawful to:

• Employ any device, scheme, or artifice to defraud
• Make any untrue statement of a material fact or omit a material fact necessary to make statements not misleading
• Engage in any act, practice, or course of business which operates as a fraud or deceit upon any person

in connection with the purchase or sale of any security.

18 U.S.C. § 1348 - Securities and Commodities Fraud

Section 1348 is the primary criminal statute for securities fraud, creating a specific crime for:

• Executing or attempting to execute a scheme or artifice to defraud any person in connection with any commodity for future delivery, any option on a commodity, or any security
• Obtaining money or property from any person by means of false or fraudulent pretenses, representations, or promises in connection with securities or commodities transactions

Other Securities Laws

Securities fraud prosecutions may also involve:

• Section 17(a) of the Securities Act (15 U.S.C. § 77q): Fraud in the offer or sale of securities
• Section 32 of the Securities Exchange Act (15 U.S.C. § 78ff): Criminal penalties for Exchange Act violations
• Investment Advisers Act (15 U.S.C. § 80b-1 et seq.): Fraud by investment advisers
• Investment Company Act (15 U.S.C. § 80a-1 et seq.): Fraud involving investment companies

Elements of the Offense

Section 10(b) / Rule 10b-5 Elements

To convict under Section 10(b) and Rule 10b-5, the government must prove:

1. Deceptive Conduct: The defendant made a material misrepresentation or omission, or used a fraudulent device or scheme
2. Scienter: The defendant acted with intent to deceive, manipulate, or defraud (recklessness may suffice in some circuits)
3. In Connection With: The fraud was "in connection with" the purchase or sale of a security
4. Interstate Commerce: The defendant used the mails or any means of interstate commerce

Section 1348 Elements

To convict under Section 1348, the government must prove:

1. Scheme to Defraud: The defendant knowingly executed or attempted to execute a scheme or artifice to defraud
2. Connection to Securities: The scheme was in connection with any security or commodity
3. Intent: The defendant acted with intent to defraud

Materiality

A misrepresentation or omission is "material" if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Materiality is an objective standard judged from the perspective of a reasonable investor.

SEC vs. DOJ Enforcement

Securities fraud is enforced by two separate federal agencies with different powers and standards:

SEC Civil Enforcement

The Securities and Exchange Commission (SEC) brings civil enforcement actions. SEC actions can result in:

• Monetary penalties and fines
• Disgorgement of ill-gotten gains
• Injunctions prohibiting future violations
• Officer and director bars
• Industry bars (from working as broker-dealer, investment adviser, etc.)

The SEC uses a preponderance of evidence standard (more likely than not). SEC enforcement does not result in imprisonment.

DOJ Criminal Prosecution

The Department of Justice brings criminal prosecutions, which can result in:

• Federal prison sentences (up to 25 years per count)
• Criminal fines
• Restitution orders
• Forfeiture of proceeds

Criminal prosecution requires proof beyond a reasonable doubt. The DOJ Fraud Section and local U.S. Attorney's Offices handle criminal securities fraud cases.

Parallel Proceedings

The SEC and DOJ often investigate the same conduct simultaneously. A defendant may face both civil SEC charges and criminal DOJ prosecution for the same underlying conduct. This is not double jeopardy because civil and criminal proceedings serve different purposes. Defendants must carefully coordinate their defense strategy across both proceedings.

Types of Securities Fraud

Insider Trading

Trading securities based on material, nonpublic information in breach of a duty to the source of that information. Classic insider trading involves corporate insiders; "tipper-tippee" liability extends to those who receive inside information.

Market Manipulation

Schemes to artificially affect the price of securities through:

• Pump and dump: Artificially inflating stock prices through false statements, then selling
• Wash trading: Buying and selling the same security to create the appearance of market activity
• Spoofing: Placing orders with intent to cancel before execution to manipulate prices
• Layering: Placing multiple orders at different prices to create false impression of supply or demand

Ponzi Schemes

Investment frauds where returns to earlier investors are paid using capital from newer investors rather than from legitimate profits. The scheme requires continuous recruitment of new investors to survive.

Misrepresentation of Financial Condition

Corporate officers making false statements about company finances, performance, or prospects, including:

• Fraudulent financial statements
• Earnings management
• Revenue recognition fraud
• Asset overstatement

Offering Fraud

Fraud in connection with the issuance of securities, including:

• False prospectuses
• Misrepresentation of use of proceeds
• Fraudulent private placements
• ICO and cryptocurrency offering fraud

Statutory Penalties

Statute	Maximum Imprisonment	Maximum Fine (Individual)	Maximum Fine (Organization)
15 U.S.C. § 78ff (Section 32)	20 years	$5,000,000	$25,000,000
18 U.S.C. § 1348	25 years	$250,000	$500,000
Wire/Mail Fraud (when charged)	20 years	$250,000	$500,000

Additional penalties include:

• Disgorgement of profits
• Civil monetary penalties (SEC enforcement)
• Bars from serving as officer or director of public company
• Industry bars
• Forfeiture of proceeds

Federal Sentencing Guidelines

Securities fraud is sentenced under USSG §2B1.1, the general fraud and theft guideline.

Base Offense Level

The base offense level is 7 for offenses involving fraud or deceit.

Securities Fraud Enhancements

Significant enhancements in securities fraud cases include:

• Loss Enhancement: Based on victim losses (the primary driver of offense level)
• +4 levels: If the offense involved 50 or more victims
• +4 levels: If the offense substantially endangered the solvency of one or more publicly traded companies
• +2 levels: If the offense involved sophisticated means
• +2 levels: If the defendant was an officer or director of a publicly traded company
• +4 levels: If the defendant was an officer or director of a registered investment company, broker-dealer, or investment adviser

Officer/Director Enhancement

Corporate executives convicted of securities fraud face a +4 level enhancement if they were officers or directors of:

• A publicly traded company (victim of the offense)
• A registered investment company
• A registered broker-dealer
• A registered investment adviser

Notable Cases

Bernie Madoff (2009)

Bernie Madoff perpetrated the largest Ponzi scheme in history, defrauding investors of approximately $65 billion over decades. Madoff, who had served as chairman of NASDAQ, operated a fictitious investment advisory business while fabricating account statements showing nonexistent profits. He was sentenced to 150 years in federal prison.

Sam Bankman-Fried (2024)

Sam Bankman-Fried, founder of the FTX cryptocurrency exchange, was convicted of securities fraud, wire fraud, and money laundering related to the collapse of FTX. The scheme involved misappropriating billions in customer funds. He was sentenced to 25 years in federal prison.

Elizabeth Holmes (2022)

Elizabeth Holmes, founder of Theranos, was convicted of wire fraud and conspiracy for defrauding investors about her company's blood-testing technology. She made false claims about the capabilities and deployment of Theranos devices. She was sentenced to over 11 years in federal prison.

Raj Rajaratnam (2011)

Hedge fund manager Raj Rajaratnam was convicted in the largest insider trading case at the time. He traded on inside information from corporate executives, consultants, and others, generating over $63 million in illegal profits. He was sentenced to 11 years in federal prison.

Jordan Belfort (1999)

Jordan Belfort, known as the "Wolf of Wall Street," pleaded guilty to securities fraud and money laundering for his role in manipulating the stock market through his firm Stratton Oakmont. His schemes defrauded investors of approximately $200 million. He was sentenced to 4 years in federal prison.

Jeff Skilling (2006)

Jeff Skilling, former CEO of Enron, was convicted of securities fraud, insider trading, and other charges related to Enron's collapse. The fraud caused losses of over $60 billion to shareholders. He was originally sentenced to 24 years but later received a reduced sentence of 14 years.

Statistics

According to the United States Sentencing Commission and SEC:

• In fiscal year 2023, federal courts sentenced approximately 300 defendants for securities fraud offenses
• The median sentence for securities fraud was 36 months imprisonment
• SEC enforcement actions result in billions of dollars in penalties annually
• Insider trading cases represent a small but high-profile subset of securities fraud prosecutions
• Cryptocurrency-related securities fraud prosecutions have increased significantly since 2020

Defenses

No Material Misrepresentation

If statements were substantially true, matters of opinion, or "puffery," they may not constitute actionable fraud. Forward-looking statements with adequate cautionary language may be protected.

No Scienter

Securities fraud requires intent to deceive. Defendants may argue they acted in good faith, relied on others, or made honest mistakes. Negligence is not sufficient for criminal liability.

Reliance on Counsel

Defendants may argue they relied on attorneys or accountants who approved the conduct. This defense requires showing full disclosure to the advisor and reasonable reliance on their advice.

Statute of Limitations

The statute of limitations for securities fraud is generally 5 years for criminal cases and 2-5 years for SEC civil enforcement.

No Connection to Securities

The fraud must be "in connection with" the purchase or sale of securities. If the fraud was tangential to securities transactions, this element may be lacking.

See also

• Wire Fraud
• Mail Fraud
• Money Laundering
• Bank Fraud
• Federal Sentencing Guidelines
• Sam Bankman-Fried
• Elizabeth Holmes
• Bernie Madoff
• Jordan Belfort

Frequently Asked Questions

Q: What is securities fraud?

Securities fraud encompasses federal crimes involving deceptive practices in connection with buying or selling securities. It includes insider trading, market manipulation, Ponzi schemes, and making false statements about investments. Primary statutes are 15 U.S.C. § 78j and 18 U.S.C. § 1348.

Q: What is the maximum sentence for securities fraud?

Under 18 U.S.C. § 1348, securities fraud carries a maximum of 25 years imprisonment. Under Section 10(b) of the Securities Exchange Act, the maximum is 20 years. Fines can reach $5 million for individuals and $25 million for organizations.

Q: What is the difference between SEC and DOJ enforcement?

The SEC handles civil enforcement, seeking fines, disgorgement, and industry bars. The DOJ handles criminal prosecutions that can result in prison. Both may investigate the same conduct—SEC civilly and DOJ criminally. The SEC uses preponderance of evidence; DOJ requires beyond reasonable doubt.

Q: What is insider trading?

Insider trading is buying or selling securities based on material, nonpublic information in breach of a duty to keep that information confidential. It includes trading by corporate insiders and "tipper-tippee" liability for those who receive and trade on inside information.

Q: What is a Ponzi scheme?

A Ponzi scheme is an investment fraud where returns to earlier investors are paid using capital from newer investors rather than from legitimate profits. The scheme requires continuous recruitment of new investors and inevitably collapses when new investment slows.

Q: What is market manipulation?

Market manipulation involves schemes to artificially affect securities prices, including "pump and dump" schemes (inflating prices through false statements then selling), wash trading (fake trades to create activity appearance), and spoofing (placing orders intended to be cancelled).

Q: Can I be charged with securities fraud for poor investment advice?

Securities fraud requires intent to deceive, not mere negligence or poor judgment. However, if an adviser knowingly made false statements or omitted material facts to induce investments, criminal charges may apply. Bad investment outcomes alone are not fraud.

References

Federal Offenses

White Collar Crimes: Wire Fraud · Mail Fraud · Tax Evasion · Money Laundering · Bank Fraud · Healthcare Fraud · Securities Fraud · Aggravated Identity Theft · Embezzlement · Bribery · Insurance Fraud · Mortgage Fraud

Other Federal Offenses: Drug Trafficking · Illegal Reentry · Felon in Possession · RICO · Conspiracy · False Statements · Obstruction of Justice · Child Exploitation