Financial investments, such as bonds and stocks, are collectively referred to as securities. When it comes to securities fraud, an individual or a company can manipulate securities through false or misleading information. Such scams are meant to affect the value of the stocks and favor the consumers, private companies, or financial institutions in one way or another. If one gets prosecuted with such cases in California, there are a lot of severe penalties that might follow. This requires the intervention of a professional criminal attorney to help in the case. San Diego Criminal Attorney offers excellent legal services to anyone facing securities fraud.
Definition of Security Frauds
One cannot get involved in a security fraud if he or she is not engaged in securities in one way or another. A layperson would not understand what security is, although there are a lot of definitions provided by the California legislature and other legislatures involved in securities law.
Types of securities that one can consider include debentures, bonds, certificates of interest of participation, collateral-trust certificates, transferable shares, and other options. There are a lot of legal requirements that result from the securities in both the federal and state levels. It is recommended to take note of these laws to ensure that you do not do anything contrary to the government requirement.
Security fraud is not a behavior that has always been a crime compared to other crimes such as murder or theft. However, over time, the federal government and the state of California have made certain activities as crimes related to security frauds as a way to protect investors.
The first time that Security fraud laws appeared was before the Great Depression that dates back in 1929. In this era, it was common to invest in a speculative business arrangement or company stocks. Some of these investments turned up to the fraudulent schemes, which raised the alarm to the government.
States within the United States spearheaded the regulations of securities sales. These laws are still referred to as “blue sky laws.” The phrase hails from the creative description of particular fraudulent investment schemes based on several feet of the blue sky. This means that investors would not get anything from their money.
The aim of coming up with these laws is to protect investors from being deceived by fraudsters who deal with companies that do not exist or in other fraudulent moves.
Laws related to federal securities came into place when the Securities Act of 1933 and Securities Exchange of 1934 were passed. Other recent federal securities laws that you probably know about include the Sarbanes-Oxley Act of 2002, Consumer Protection Act of 2010 and the Dodd-Frank Wall Street Reform.
In California, the most common securities fraud law is the California Corporate Securities Law of 1968.
California Corporate Securities Law of 1968
The California Corporate Securities Law of 1968 became effective on 2nd January 1969. This security law regulates everything related to the sales and offers of California securities. Unlike the Federal Securities Act enacted of1933 and the Securities Exchange Act of 1934, the securities law can regulate both the issuers and secondary sellers of the securities within California and is meant to protect the consumer from any fraudulent activities.
To achieve this goal, the Securities Law expects all the sales of securities within California to be registered with the California California Department of Business Oversight. It also includes any securities exempted and listed in the California Corporations Code Sections 25102. The exempted securities contained in the statute include the following common option:
- Any offer that is not for sale that does not involve any public offering and execution and the delivery for an agreement of securities sale according to the offer pertaining the specific legend or no part of the price of purchase is sold until the securities have qualified under this law unless they are exempted by the Section 25100 and 25105
- An offer that is not for the sale of a registered security that falls under the Securities Act of 1933 or the Corporation Code Section 25102(b)
- Any sale or offer of particular evidence of indebtedness, whether it is secured or unsecured and any specific guarantee thereof, in any transaction that doesn't involve any public offering, provided under Corporations Code Sections 25102 (e)
Securities laws protect most entrepreneurs in California and incorporate any business aiming to issue stock in California. The issuance should be registered or should be exempted under the California Corporation Code Section 25102.
Type of Actions Referred to as Security Fraud
Securities fraud is a complex area of California criminal law. Several actions can make a person or a corporate face criminal liability for California’s securities laws. It is essential to understand these facts to avoid any situation related to securities fraud. The following are examples of actions that are referred to as security fraud.
Sale of Unqualified Securities
If you want to get involved in the sale of securities in California, you should check whether they have qualified with the California Department of Corporation. Qualifying securities in this department consists of a lot of paperwork and the disclosure of companies issuing the securities. Failure to complete the paperwork may result in severe criminal consequences that include jail time.
Luckily, the requirement for securities qualification does not apply to the sale of every type of security in California. Exclusive sales and offers are usually exempted and do not need qualifications. One category of these exempted sales is a situation where a small business or individual gets accused of fraud for selling or offering the unqualified securities.
There is an exemption for the sale of a relative number of people with preexisting relationships with anyone selling securities. One can avoid criminal penalties for the sale of unqualified securities if the following are true:
- You sold the securities or made an offer to not more than thirty-five people. In this case, a husband and wife count as one person
- Anyone who has bought stock and did so on his account. This means that one does not plan to re-sell or distribute the securities to anyone else
- You did not make an advertisement about your sale or offer to for securities, and
- Anyone involved in the buying or you provided the security has a preexisting business or personal relationship with you or has significant experience in finance and is considered capable of protecting his or her interest.
Other examples of selling unqualified securities are having a good-faith belief that the Department of Corporations has qualified particular security, but has not. In such a situation, your sale or offer qualifies to be a crime if you willfully sold the securities without the requirements needed for qualifications. For instance, if someone lies to you that they have experience in investing in securities, prompting your involvement, such a situation does not count as a willful experience in the trade.
Use of Misleading Behavior in the Sale or Purchase of Securities
If you do not own or run a firm and are not in any position to issue securities to any person, you should be concerned about California Securities fraud laws in case you mislead anyone. It is illegal to engage in any activity designed to portray a false or misleading impression when marketing particular security. This means that you should not engage in any trade that will require you to manipulate the market to achieve something.
Some of the examples that explain a misleading behavior in the purchase or sale of securities include:
- Trading in securities in a way that does not change its ownership, to make a deceptive impression
- Falsely impressing the need to buy or sell securities with the knowledge that someone else will enter into the trade to offset securities of the same size
Use of Misleading or False Statement To Sell Securities
It is illegal to knowingly lie to innocent investors into the sale or buying of securities. This kind of engagement is a criminal fraud by itself and falls under the activities that can lead to severe penalties under the California securities fraud law.
This is one of the most renowned types of securities fraud. If you can access insider information about a particular company that is not available to the public and you only know it due to the relationship with the company, it is a criminal offense to buy or sell securities according to such information.
With the increased growth of the internet, you would expect to experience internet fraud. Popular forms of internet-based fraud. Popular types of internet-based securities fraud happen on internet boards or forums. In such platforms, deception usually takes place through knowingly inflating the offender’s stock. Internet fraudsters stick to the inflated price and sell through misleading information or information that seems positive but are fabricated to lure a victim party to purchase the securities.
This kind of fraud became popular during the early 2000s. It is a type of investment fraud in which accounting firms falsify financial reports. In such an incidence, accounting firms mislead corporate clients by failing to provide truthful information or neglect to identify falsified accounts. Such types of frauds can lead to losses that amount to billions of dollars if left unchecked.
Mutual Fund Fraud
In this type of fraud, the customers are put in significant risk of loss to benefit dishonest mutual fund managers. Such kind of fraud occurs in large-scale brokerage and fund firms, where they secretly delay trading without the knowledge of their clients. Although there might be no open securities fraud at first glance, some mutual funds firms usually operate under undisclosed conditions that allow disadvantageous financial practices at the expense of the customer.
This is a form of investment fraud in which companies with a market value under 250 million promote their stock deceptively before selling them to an unaware buyer. Popular stocks involved in this sort of fraud include penny stock, although they account for more than five dollars every share. This can lead to annual losses that amount to billions.
Breaching Fiduciary Duty
Every financial company has a fiduciary duty for every investor. In that case, they have to respect the best interest of investors and should not place any personal gain ahead of the securities. Some of the examples that explain fiduciary duty include a conflict of interest and other actions that involves a company or individual trying to seek profit over their clients.
This is a situation where a broker trades stock for their profit to get a commission from every transaction. Such a situation might put the investor’s money at risk. This might seem illegal or unethical, and one might end up serving jail time or pay a fine that can amount to the securities they are violating.
Brokers should have a license to work in any financial institution. However, a broker without consent might participate in trading, which is referred to as malpractice. Such a situation is just an example of minor securities violations but might end up putting you in jail or incurring hefty fines.
Abuse of Hedge Fund
Investors might believe that they have little protection for their securities through a hedge fund. However, the funds’ manager might be dishonest about his or her background or qualification to get involved in hedge fund theft.
A Ponzi scheme fraud is not directly associated with securities fraud but is associated with it indirectly. In such scams, a fraudster comes up with a pyramid or Ponzi scheme to draw funds furnished by investors to pay up returns in a prior failed investment plan. Such programs usually target more and more victims to maintain the sham.
Penalties for Security Fraud in California
In California, security fraud crimes are wobbler. Therefore, the prosecutor might charge you with a misdemeanor or a felony. Violation of the California securities fraud law might put you at risk of prison sentencing and massive fines.
If you are involved in the willful sale of securities without compliance with the qualification requirements, or in a way that violates the terms and condition of qualification, you are at risk of:
- A maximum fine of $1,000,000
- 16 months, two, or three years county jail service
If you engage in the willful manipulation of the market, participate in an insider training, or making a false statement in a securities transaction, you might face steeper penalties such as:
- A maximum fine of $10,000,000
- Service in a county jail for two, three or five years
Besides being charged under California laws, you can also face penalties related to federal securities fraud laws. Under federal securities law, securities fraud attracts both civil and criminal penalties. The kind of penalties that apply are as follows:
- High fines depending on the circumstances of the lawsuit. In some frauds such as insider trading, you might end up receiving a possible fine of $ 5 million while others attract low fines such as $10,000
- Prison sentence for a minimum of five years in federal prison for every crime that you commit
- An offender can also get probation if the offense involved is a single instance and does not cause any financial loss to the target victim. Probation might last for several years, although five years are usually common. The probationer must meet with the probation officer regularly and comply with other requirements provided by the court.
- Finally, the offender might be required to reimburse the innocent victim of their monetary loss due to security fraud. The restitution is made in full and on top of the fines.
An offender can also face a civil suit for California securities fraud. Such kinds of lawsuits are filed by the people who claim to be harmed by your actions. If a civil lawsuit goes through, you might be required to reimburse all the people involved in your fraudulent activity and pay a criminal fine as well.
Under the California Department of Corporation, violation of securities fraud laws should not exceed a fine of $25,000 per violation.
Legal Defense for Security Fraud in California
As soon as you hire a professional attorney, you expect him or her to employ relevant legal strategies to help in winning or reducing your criminal or civil charges. When it comes to legal defenses for security fraud, several strategies can be employed. These strategies are as follows:
Your Statement Was Not Fraudulent
Your prosecutor must prove that the statement that you gave was fraudulent to determine whether you were involved in security fraud. If there is no relevant proof for such an account, then the charges do not qualify as a fraudulent action.
In this situation, the government is usually involved in coercing you into creating an environment that will promote securities fraud. Such circumstances might be rare, but whenever a leeway is found, fraudsters might use the opportunity for their false motives.
Lack of Intent
The prosecutor must provide valid proof that you had the intention to defraud investors to make the case compelling enough. However, in a situation that does not show any intent for such activities, the prosecutor should not dismiss the case. For instance, if you run a charity campaign that ends up closing down, this does not show that you had the intention to defraud the investors, especially if there was no reasonable foresight or a possible downfall.
Lack of Sufficient Evidence
In most cases, a paper trail would be the best evidence to prove that you were involved in financial crime. However, if there is no relevant bank records or a reasonable doubt over the evidence provided, the court might decide to dismiss your case.
Sometimes investigators might easily confuse one offender to the other when they have similar appearances. If you are arrested over such confusion, your attorney should ensure that your case is dismissed. However, you must provide valid proof of your whereabouts to establish your innocence. Some of the evidence that proves your locations include financial statements, receipts, and camera footage.
Sometimes the police might use overbearing measures such as involuntary confessions and implicate you in committing a particular offense. Some of the examples of improper or illegal interrogation include:
- Depriving food and water
- Continued questioning without the presence of an attorney
- False promises of leniency in exchange for a confession
- Threatening or harming you
Some tactics are quite overbearing and might coerce innocent people to admit to crimes such as securities fraud, which they did not commit in the real sense. If you can prove to the police that the evidence provided was falsely derived, you might have your case dropped by the court.
Crimes Related to Security Frauds in California
Several crimes are related to security fraud in California. These kinds of crimes either share the same penalties with this kind of crime or have similar approaches. It is recommended to know these related crimes since they might be associated with your case, and you might opt to plea to be charged with them if they attract lesser penalties. These related crimes are as follows:
California False Impersonation Law: Penal Code 529
One of the outstanding forms of securities fraud is impersonating a broker and luring people into the buying of securities. Such offense falls under the California false impersonation law. Penal Code 529 applies when you:
- Pretend to someone else, and you either
- Commit an act that will expose another person to a criminal or civil liability or
- You did something that causes another person to pay money, or
- Will gain some benefits from your impersonation
Violating Penal Code 529 is a wobbler offense, meaning that one can be charged with a misdemeanor or a felony. If you get charged as a misdemeanor, the possible penalties are as follows:
- Summary or misdemeanor probation
- Custody for a maximum of a year in a county jail
- A fine of up to $10,000
If you are charged with a felony, the possible penalties include:
- Formal or felony probation
- Service in the county jail for a maximum of three years
- A fine of up to $10,000
If you face securities fraud allegations, you can request your attorney to plea a reduced charge under Penal Code 529 since it has lesser penalties, and there is a possibility of probation.
Facing a security fraud allegation can be a difficult situation. With the kind of penalties that follow, it is evident that one should seek help from a professional attorney to have the case dismissed or reduced to a lesser charge. San Diego Criminal Attorney offers excellent legal services to anyone facing securities fraud charges. If you are living within San Diego, CA, contact us at 619-880-5474, and schedule an appointment with us.