Securities are business arrangements where an individual receives a particular percentage of business ownership. When you invest in a business through stocks, mutual funds, or bonds, you will benefit from the profits that the business makes. Commodities, on the other hand, are goods that could be exchanged with other goods of a similar kind. You commit a crime of securities and commodities fraud when you engage in activities involving securities and commodities.
There are different ways an individual can be involved in violating California securities and commodities fraud, including providing false information to investors, omission of facts to entice investors, and selling unqualified securities. Securities and commodities fraud is a serious white-collar crime that could attract criminal charges at the state and federal levels. If you or your loved one faces criminal charges for this type of fraud, you will require the guidance of a skilled criminal attorney. At Los Angeles Criminal Attorney, we offer top-notch legal guidance and representation to our clients battling fraud charges in Los Angeles, CA.
Overview of Securities and Commodities Fraud in California
Securities and commodities fraud seems like a complicated crime involving large sums of money committed by sophisticated criminals. The reality is different. You can unknowingly commit this crime as an employee doing your regular job. Under California law, securities are a business arrangement where a person receives a particular percentage of business ownership and a right to repay debt. Securities can be an investment through mutual funds or stocks from different individuals hoping to receive profit from their investment.
When a person invests in a business using stocks or money, they acquire partial ownership of the enterprise. As shareholders, individuals who invest in these businesses profit by selling their shares at a higher price. Some of the securities that Corporate Securities and Commodities protect include:
- Company stocks
- Certificates that indicate an individual as an interest holder in a profit-sharing agreement
- A partner’s interests in a limited liability company
Securities fraud occurs when you attempt to manipulate the investment market unlawfully. This happens when you make false statements regarding a business and the value of its stocks with the intention of enticing other people to invest in it. If a person relies on the false information you provide and they end up losing their money, you can be charged with securities fraud.
Individuals who want to sell securities have the legal obligation to inform the investors of the actual cost and the risks associated with these securities. Misrepresentation of information could include falsification or withholding information that is key to another person’s financial decisions. Additionally, providing information that could affect a person’s decision to invest or purchase shares from your company will suffice as an element of securities fraud. Charges for securities fraud could be charged on the following individuals:
- Corporate executives or private investors acting on inside information
- Securities dealers who intentionally mislead clients
- Business executives who fraudulently alter accounting entries
- Dealers who destroy or conceal information
- Financial advisors who disclose confidential information
The corporate fraud section unit is responsible for investigating securities and commodities fraud. The investigations of this type of fraud are based on referrals and complaints from federal and state law enforcement agencies.
Commodities are goods that can be interchanged with goods of a similar kind and are used in commerce. Most commodities are used in the input of service and goods production. Although the quality of goods could differ slightly, it is common among producers. You commit the crime of commodities fraud when you sell a commodity unlawfully.
Securities and commodities fraud is a serious white-collar crime with a challenging and complicated background. If you face charges for this offense, you may be tied to the state or federal court system for a long time. If the court finds you guilty of securities and commodities fraud, you could face hefty penalties, including prison time and fines.
Acts that Constitute Commodities and Securities Fraud
The laws on security fraud are complicated. The following are some acts that could put you at risk of arrest and prosecution for securities fraud:
Hedge Fund Abuse
Hedge funds are securities transaction vehicles that falsely convince investors they have little or no protection. Often, hedge fund managers gain clients based on their reputations and perceived success. These managers must have in-depth market knowledge, and investors pay for their services. Compared to other types of investments, hedge fund fees are significantly higher.
Hedge fund abuse occurs when managers lie or exaggerate their qualifications, background, and expertise. This can cause clients to lose their money by trusting false information. Hedge funds are less regulated compared to other investments. This makes them more susceptible to fraud.
While many ethical brokers exist, some individuals violate their ethical and moral obligations toward their clients. Common broker misconduct could include margin trading, misleading illustrations, or unsuitable investments. Actions that constitute broker misconduct can expose clients to substantial financial losses while the broker seeks compensation for liability damages.
Omission of Facts
As a securities advisor, you must disclose all the necessary facts of an investment when sharing the opportunity with a potential client. Offering full and correct information allows a person to make the right decision. Unethical advisers and brokers may tend to omit some information that would cause the client to make a wrong decision leading to financial loss.
Selling Unqualified Securities
Before you sell securities to another person, they must be qualified with the Department of Corporations. The qualification process involves extensive disclosures and paperwork about the company issuing these securities. Failure to complete the necessary paperwork before the sale could result in criminal charges and penalties for securities fraud.
The qualification requirements don’t apply to all securities. One of the categories of exempt securities sale arises when a small business owner faces allegations of selling unqualified securities. Often these scenarios occur when the involved parties have a pre-existing relationship and a sophisticated investor is not involved. A business deal involving exempt securities will only be valid under the following circumstances:
- You offered or sold the securities to thirty-five individuals or more
- You did not advertise the sale of your securities
- All individuals involved in the securities transactions planned to resell the securities.
- You had a pre-existing business or personal relationship with the people you sold the securities to.
If you act centrally to the requirements, the court can prosecute you and find you guilty of securities fraud.
Insider trading is a common form of securities fraud in California. If you have some critical or confidential company information as a trusted employee, an attempt to purchase or sell securities relying on this information is a criminal offense.
Misleading Conduct in Securities Deals
You can face allegations of securities fraud if you engage in misleading acts when dealing with securities. Willful trading of securities through market manipulation is a crime under California law. The following are dishonest behaviors that constitute securities fraud:
- Trading securities without changing ownership for false success impressions
- You enter a securities purchase or sales order with the knowledge that another person will make a similar order.
Churning occurs when a broker unjustly enters into fraudulent transactions to gain or generate commissions using discrete accounts. A securities broker can also engage in churning in a non-discrete account when the broker is in a position to determine the frequency and volume of the transactions. Often, investors report churning behavior when there is a disparity between the turnover of the account they invested in and similar accounts.
Commodities fraud involves the traded assets on market exchanges. This type of fraud involves the failure to register with an exchange. Individuals who transact for the sole purpose of generating profit for themselves could face charges for commodities fraud.
California Securities Fraud Laws
Both state and federal laws govern the investigation, prosecution, and punishment of securities fraud. Therefore, engaging in fraudulent acts could result in criminal charges in federal or state court. Some of the statutes that fall under this category include:
California Corporation Code 25400
Under CORP 25400, it is unlawful to engage in the following actions:
- Effect a transaction that does not benefit someone or enter orders to purchase securities to create a false and misleading appearance.
- Effect a series of transactions in the creation of securities through raising or suppressing the price of the securities.
- Offering for purchase or sale of a security by the circulation of false information about a potential rise or fall in the price
- Making false statements to induce or entice potential investors into the purchase of non-profitable securities
California Corporations Code 25401
Under California CORP 25401, it is unlawful for any person to sell or offer securities in the state through oral or written agreements that contain untrue statements. A statement may be considered untrue when the facts it represents are false, exaggerated, or there is an omission. You could face criminal charges under this statute if you are tasked with controlling information about another person and you directly or indirectly allow members of the public to access that information.
Violation of this statute is charged on all individuals who had knowledge or control of the information. If you assist another person in committing a crime under this statute, you will be charged and punished the same as the person that committed the offense.
CORP Section 25402
CORP section 25402 makes it a crime for an issuer or another officer or person with access and control of material information that is not accessible to the public to purchase or sell securities using the information you gained unlawfully. Additionally, if you cause another person to use information that you knew would affect the market price of that security, you can be charged under this statute.
Sarbanes Oxley Act (2002)
The Sarbanes –Oxley Act of 2002 was passed to help protect investors from fraudulent financial reports by corporations. Commonly known as the SOX Act, the law mandates strict reforms to the existing securities and imposes harsh penalties on the lawbreakers. The SOX Act was implemented in response to the financial scandals involving publicly traded companies. The 2002 claws reformed the 1934 Securities Exchange Act and other Securities Laws. The new laws included additions in the following principal areas:
- Corporate Responsibilities
- Increased criminal penalties to discourage fraudulent behaviors
- Advanced protections
- Accounting regulations
Securities Act of 1993
The Securities Act of 1993 was enacted into law to protect investors after the stock market crash in 1929. The legislation has the following goals:
- Ensure transparency in financial statements. This ensures that investors have full information about the risks associated with the securities before they put their money into securities or commodities. With accurate and transparent information, investors make more informed decisions.
- Establish laws that prohibit fraudulent activities such as misrepresentation of acts in the securities markets.
Before passing the act into law, the sale and purchase of securities were governed by state laws. The 1993 act allows room for more transparency and a requirement for company disclosure. Before a person makes investments in your company, you must provide the following information:
- A clear description of the company’s business and properties
- Details of the security that is up for sale
- Key information about executive management
- Financial statements that must be certified by independent accountants
Some securities are exempt from mandatory registration, including:
- Intrastate offerings
- Securities that are issued by state, municipal, and federal governments
- Offerings that are limited in size
- Private offerings that have a limited to a few institutions or persons
Investment Company Act
The Investment Company Act is a congress act regulating investment companies' organization and daily activities. The act sets standards for investment companies while protecting investors and ensuring they know about the risk of owning or purchasing securities. Under the 1940 Investment Company Act, investment companies must provide their investors with details on the following:
- Investment policies and objectives
- The financial condition of the company
- The structure of the investment company and its operations
Additionally, the Act provides regulations on transactions of some affiliated individuals and indicates requirements on:
- Record keeping
- Distribution of securities
- Changes in the investment policies
Penalties for Securities and Commodities Fraud
Securities and commodities fraud is a wobbler. A wobbler is an offense that can be charged as a felony or a misdemeanor. While the prosecution has the discretion when filing your charges, your criminal history and the exact nature of your crime could affect their decision. If you face criminal charges for the willful sale of securities that don’t comply with the qualifications, you risk facing felony charges and the following penalties after your conviction:
- Fines of up to $1,000,000
- A prison sentence ranging from sixteen months to three years
On the other hand, securities fraud charges arising from the manipulation of accounts or making misleading statements attract the following punishment:
- A fine of up to $10,000,000
- A prison sentence of two, three, or five years
Although fraud crimes are non-violent, they can result in significant financial losses for the victims of the fraudulent acts. As part of your sentence, the court will order that you pay restitution to the individuals who suffered a loss. Victim restitution is paid to individuals whose financial losses directly result from your actions. When there is no identifiable victim, the restitution fees will go to the government.
Probation for Securities Fraud
Probation is a possible sentence following your conviction for securities fraud. If the court sentences you to probation, you will serve a part of your prison sentence out on community service. The court does not offer probation to all offenders, you may be eligible for probation in this case if your underlying securities fraud does not result in substantial loss or it's your first offense.
Probation for securities and commodities fraud lasts for up to five years. Attached to your probation are some strict probation conditions that you must strictly follow through the probation period. As the court subjects you to probation, a probation officer is appointed to monitor your progress. As a condition of your probation, you must regularly meet with your probation officer. If you violate one of your probation terms or commit another offense, the officer is responsible for reporting the violation to the court.
Federal Securities Fraud Laws
The purchase and sale of securities is a crucial component in the economy of the United States and other global markets. For this reason, securities and commodities fraud can attract federal criminal charges. Under federal law, security could be a variety of investments, including bank notes, contracts, or bonds. Federal securities fraud is charged under U.S.C 1348.
Securities and commodities fraud is punishable by a 25-year federal prison sentence and hefty fines. You must understand that attempting this crime attracts similar punishment as the actual violation. The federal court can impose a harsher penalty if you cause substantial loss or the crime drastically affects the victim’s business.
Defense Against Securities and Commodities Fraud Charges in California
Whether you face charges in federal or state court, fraudulent acts involving securities and commodities will result in serious charges and harsh penalties. The best response to fraud allegations is to hire a criminal lawyer to guide you through a defense. Common defense strategies you can employ in your case include the following:
You will be charged with securities and commodities fraud for engaging in one act that constitutes the offense. Before obtaining a conviction, the prosecutor must prove beyond a reasonable doubt that you engaged in the fraudulent act. Prosecutors present physical and circumstantial evidence to tie you to the crime. With the guidance of a skilled attorney, you can create reasonable doubt in the prosecutor’s case and argue a lack of sufficient evidence to convict you.
You Lacked a Criminal Intent
Sometimes, fraudulent acts could result from normal acts that you think are within the scope of your employment. Therefore, your intent to defraud another person or gain undeserving financial benefit must be clear to prove your guilt for securities fraud. A criminal intention is one of the most difficult elements to prove in criminal proceedings. Therefore, you can argue that a good faith belief drove your actions.
No Deceitful Statements
Not all false statements are geared toward committing fraud. Your false or misleading statements will only constitute fraud if you made them with a prospective future gain. If you expressed your opinion that you did not know wrong, you could not be found guilty of securities fraud.
Cases of securities fraud take a long time to resolve. The lengthy investigations could tie you to the court system for a long time. During these investigations, your personal and professional life will suffer if you are held in police custody. A person can falsely accuse you of the offense out of anger or revenge. The court could dismiss your charges if you can prove that you had no connection to the fraudulent acts.
Entrapment involves pressure from law enforcement to engage in criminal acts. You should be able to resist any pressure to commit a crime. Therefore, when using entrapment as a defense to your fraud charges, you must prove that without the pressure from the police, you would not have engaged in the alleged criminal acts.
Find a Knowledgeable Criminal Lawyer Near Me
The consequences of a conviction for securities and commodities fraud are serious and life-changing. If you face charges in state court, a conviction will attract a prison sentence of up to five years. As a federal crime, engaging in commodities and securities fraud could cause you to spend up to twenty-five years behind bars.
Fortunately, not all arrests and felony charges result in a conviction. With the guidance of a competent attorney, you can fight the charges to avoid the harsh consequences of a conviction. You will benefit from the legal insight we offer at Los Angeles Criminal Attorney if you face securities and commodities fraud charges in Los Angeles, CA. Contact us today at 423-333-0943, and we will guide you toward obtaining the best outcome for your case.