Under federal law, securities are stocks, bonds, options, investment contracts, and certain digital asset offerings. 18 U.S.C. § 1348 governs fraud involving federal securities and commodities. This statute was adopted in 2002 as Section 807(a) of the Sarbanes-Oxley Act, which models the longstanding federal mail and wire fraud statutes. It was designed to expand the range of fraudulent securities conduct beyond what was traditionally prosecuted under existing fraud statutes – mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), bank fraud (18 U.S.C. § 1344, and health care fraud (18 U.S.C. § 1347).
18 U.S.C. § 1348 was created in the wake of corporate-accounting scandals such as Enron and WorldCom, to strengthen criminal enforcement against fraud involving publicly traded companies and their investors. It established a standalone federal criminal offense for securities fraud with a penalty up to 25 years plus fines (up to $250,000 for individuals), restitution, forfeiture, and supervised release. In 2009, Congress amended § 1348 through the Fraud Enforcement and Recovery Act to include commodities fraud along with securities fraud.
WHAT CONSTITUTES CRIMINAL SECURITIES FRAUD
The government must prove beyond a reasonable doubt the following three elements; namely, the defendant:
- Engaged in a scheme or artifice to obtain money or property through materially false and fraudulent pretenses, representations, or promises.
- With intent to defraud through actions taken intentionally, deliberately, and voluntarily, rather than by mistake, accident, or carelessness. There must be a specific intent to deprive another person of something of value.
- There must be a nexus between the scheme to defraud to the purchase or sale of securities of a company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934—15 U.S.C. § 781. This does not require a showing of a wire or mail fraud violation.
It should be noted that under §1348(1) both individuals and entities “can face prosecution for either knowingly executing or knowingly attempting to execute a securities fraud scheme” while §1348(2), extends prosecution to brokerage firms, and advisory firms, individual broker and advisors, and other entities and individuals in situations not covered under §1348(1)
In addition to a specific §1348 charge, the government may bring related charges such as wire fraud, mail fraud, conspiracy, obstruction, false SEC filings, or insider-trader theories.
AGENCY CIVIL PROSECUTIONS
Beyond a §1348 criminal charge, civil prosecutions can be initiated under Exchange Act § 10(b) and SEC Rule 10b-5, which prohibit schemes to defraud, materially false statements, misleading omissions, and deceptive conduct “in connection with” buying or selling a security.
Remedies in these civil proceedings can include injunctive relief, officer/ director bars from serving at a public reporting company, court-ordered disgorgement of any “ill-gotten gains” from the scheme, and private damages for investors losses.
PRINCIPAL DEFENES
An experienced criminal defense attorney tailors a trial strategy to the charging statute, the documents, communications, trading records, and jury instructions. Within this tactical framework, the following defenses can be pursued:
- Lack of Fraudulent Intent/Good Faith: The defendant made an honest mistake, relied on reasonable data, believed disclosures were accurate, and/or did not intend to deceive. Good faith negates the requisite intent, meaning it is more than a mere appeal to fairness.
- Statement Was Not Material: The prosecution’s claimed misstatement or omission did not meaningfully influence a reasonable investor’s decision.
- Statement Was True, Qualified, or Not Misleading in Context: Full disclosures, risk warnings, underlying records, and full communications between the parties may defeat the charge based on a selective quote.
- No Duty To Disclose: Silence alone does not always translate into fraud. The prosecution must establish a duty to disclose or show that what was said became misleading by failing to disclose a necessary fact.
- No Nexus To A Covered Security Or Transaction: The prosecution has failed to meet its burden of establishing a relevant statutory nexus between the alleged fraud and the particular financial instrument or entity covered by the charging statute.
- No Participation or Knowledge: Defendant only performed a ministerial role, lacked access to relevant information, or reasonably relied upon others without joining a deceptive scheme.
- Advice of Counsel: Good faith (or lack of specific intent) may be shown when the defendant fully disclosed the material facts to competent counsel and thereafter relied on counsel’s advice to proceed with certain actions. Attorney/client privilege can be waived on those communications.
- Legitimate Trading Explanation: Defendant in an insider-trading case may rely on preexisting Rule 10b5-1 trading plan; lack of any material non-public information; no duty/breach; or no use of the insider information.
- Causation and Loss Challenges: Defendant may offer evidence that market-wide events, intervening disclosures, or other causes to explain an investor’s losses in both criminal sentencing/restitution proceedings and private civil damages lawsuits.
- Procedural and Evidentiary Defenses: Unlawful searches, defective subpoenas, improper custodial interviews, hearsay statements or assertions, unreliable expert testimony, discovery disclosure failures, or an expired limitation that may bar or limit the government’s evidence (such as the 18 U.S.C. §3301 six-year limitation to bring a securities fraud criminal prosecution).
CONCLUSION
If you or a loved are currently under investigation or have been charged with a federal securities fraud violation, you should contact an experienced criminal defense attorney right away. Attorneys at the John T. Floyd Law Firm stand ready to provide you with a free consultation and representation should you so choose.
