What is Securities Fraud?

“Securities fraud” is a broad term that encompasses a number of activities.  At its essence though, a charge of securities fraud will generally involve allegations that a defendant either deceived investors or manipulated financial markets.  For instance, securities fraud can include allegations of inducement of investors to make purchase or sale decisions based on false information in violation of securities law. 

It can also include theft from investors (i.e., embezzlement by stockbrokers, stock manipulation), insider trading, misstatements on a company’s public financial reports, and lying to auditors.  Securities fraud can be perpetrated by companies (such as the Enron scandal in the early 2000’s or the sub-prime mortgage crisis of 2007-2008), or by individuals (by investment bankers, stockbrokers, traders, etc.). 

In the last 100 years, securities fraud cases and the defendants in those case have made some of the biggest headlines:  Charles Ponzi, Michael Milken, Bernie Madoff and Elizabeth Holmes.  While these are high-profile defendants, securities fraud cases are brought every day by the United States Department of Justice and its component agencies.

Some Common Cases of Securities Fraud

As has been stated, securities fraud can take shape in many forms, some more obvious than others. Below is a brief overview of some the most common types of securities fraud prosecuted by the federal government.

            Accounting Fraud – As the name would imply, this is a criminal scheme in which a company’s financials are exaggerated or made to look better than they really are in order to attract investors.  Like every other securities fraud type case, the essence of the crime is some form of misrepresentation or deceit.    

           High Yield Fraud – High yield fraud occurs when an investor receives promises a high rate of return with little to no risk, or in other words, investments that are “too good to be true.”  This type of securities fraud can involve securities, commodities, real estate, etc.). Many of these fraudulent activities often occur unsolicited, or without the victim approaching the perpetrator, but rather the other way around. This is different than a high-yield bond investment, which offers higher than investment-grade interest rates, which is completely legal.

            Churning – This is a crime in which a securities broker, motivated by a desire to earn excessive fees or commissions, convinces a client to engage in excessive trades.  In many of these types of cases, the “victim” will be an elderly person or someone unsophisticated in financial matters.    

            Ponzi & Pyramid Schemes – A “Ponzi” or pyramid scheme occurs when investment money from new victims is used to pay off money owed or promised to earlier victims. This scheme creates the appearance that the investment is sound and returns are being realized, when in reality investors are the ventures only source of funding.

            Insider Trading – Insider trading is not only one of the most common, but also one of the most publicized types of securities fraud. It occurs when someone with confidential information about a  company’s financial status uses that information to make decisions on whether or not to buy or sell the stock before that information is disclosed to the public.

            Third Party Misinformation – Often termed “pump and dump” schemes, occur when a third-party releases false information (misrepresentations) about a company, a particular industry, or about the stock market in general. In a typical “pump and dump” scheme a person will usually find a little-known company and buy large amounts of shares at a cheap price. The individual will then send out false positive information about that company in order to encourage others to purchase stock, thereby driving up the stock price. Once the price is high enough, the individual will then sell off his shares for a profit.

            Microcap Fraud – Microcap stock fraud involves “microcap” companies which are companies with a market capitalization of under $250 Million. Most stocks involving microcap companies are “penny stocks”, which are stocks that trade less than $5 per share, are not listed on a national exchange, as well as other criteria. Some types of microcap fraud include “chop stocks” which is when stocks are purchased for pennies and sold for dollars, providing brokers and promoters with massive profits.

The Elements and Penalties For Securities Fraud

While each state has its own set of securities laws, the primary governmental body that is responsible for regulating and prosecuting securities fraud claims is the Securities and Exchange Commission (“SEC”). The two prominent sets of laws that govern securities are The Securities Act of 1933 and the Securities Exchange Act of 1934. The 1934 Act is the law that created the SEC. While a securities fraud crime can be prosecuted under either state or federal statutes, most are prosecuted as federal crimes. Any person who willfully violates any provision of the federal securities law is guilty of a felony offense. 

The main federal statute under which federal securities crimes are prosecuted is 18 U.S.C.§ 1348.  Under this statute, a federal prosecutor generally needs to prove two basic elements:

(1) the existence of a scheme or artifice to defraud and
(2) the intent to defraud in connection with the purchase or sale of a security. 

This statute and elements to be proven are very similar to the bank, mail and wire fraud statutes.  The key element is proving a scheme or artifice to defraud.  Without being able to prove intent to defraud, the government cannot prove a crime.  The most common defenses in securities fraud cases, including other federal fraud cases, is lack of knowledge and good faith belief.  Unless the government can show the requisite criminal intent (mens rea ), there is no crime.  However, it is equally important to note that the statue does not require a defendant have actually profited from the scheme to defraud.  Thus, a person can be convicted for securities fraud without having actually gained and/or received a financial benefit.     

A conviction for securities fraud can bring with it hefty penalties for anyone involved. Very high fines associated with securities fraud are not uncommon.  In some cases, such as insider trading, fines can soar as high as $5 million dollars.  Except for a few unique circumstances, federal law allows up to 5 years per offense for securities fraud convictions. Another possible penalty is probation.  Probation is usually available for defendants who were involved in only a single offense and their crime did not result in financial loss.  Finally, another penalty imposed for securities fraud convictions is restitution. When there is monetary loss as a result of a defendant’s deceit or fraud, the courts can order the defendant to pay money back to the victims, in addition to any fines assessed.

The government takes securities fraud crimes very seriously, and it’s important to have legal representation familiar with both the federal system as well as the elements of each crime. The SEC rules and regulations are quite complex, can be difficult to navigate, and are often a source of confusion.  Additionally, the government frequently prosecutes securities fraud in conjunction with other charges such as tax fraud, healthcare fraud, money laundering and racketeering (RICO).  If you’ve been accused of a violation of securities law, it’s imperative to make sure you hire the right attorney to handle your case.  Being charged with securities fraud can have life and career altering consequences.


The law is very nuanced. Federal prosecutors have almost unlimited advantages and resources at their disposal. Having attorneys on your team that understand the law, keep abreast of legal developments in the law, have the experience dealing with the complexities of federal statutes and, finally, possess the skills to stand before a jury to make a compelling case on behalf of a client are not just important qualities, they’re critical. At The Federal Defenders. we pride ourselves on being advocates for our clients. With decades of experience with all variety and manner of federal criminal issues and defenses, we understand what it takes to put our clients in a winning position. For a free and confidential consultation, call us today at (800) 712-0000. Just like our toll-free number, we operate nationwide.