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I. SEC Cases Generally

The U.S. Securities and Exchange Commission (“SEC”) has the authority to investigate civil fraud and other related matters concerning “securities” as they relate to investors, investments, and investments schemes.  The definition of a security is very broad and involves not just stocks and bonds, but a variety of investments, including undivided interests and promissory notes.  These investigations and resulting cases are civil, as opposed to criminal in nature.  As an administrative agency, the SEC is granted the power to supervise the securities industry.

A civil law enforcement authority does not have the authority of the police, criminal investigative agents, or prosecutors.  The Privacy Act of 1974 does not authorize a civil agency like the SEC to solicit information from a person until the agency identifies itself and explains the nature of the investigation.  The powers of the SEC are restricted to civil suits, although the SEC can share information obtained in its investigation or case with criminal prosecution authorities.  These usually are attorneys for the U.S. Attorney’s Office or the U.S. Department of Justice, and investigative agents for them, such as the Federal Bureau of Investigation, or agents of the I.R.S. – Criminal Investigation Division.  The SEC, like other civil authorities, may issue subpoenas to compel testimony and produce documents, but in the case of invoking the Fifth Amendment privilege against self-incrimination, it does not have the authority to grant immunity from criminal prosecution.

The remedies and results that the SEC may potentially achieve are:  1) an injunction, an order a private plaintiff obtains from the court commanding a person or entity to stop certain actions; 2) restitution, paying the injured party for his/her losses; 3) disgorgement, or the repatriation, or returning of monies/ill-gotten gains received as the result of his improper conduct; 4) denial of privileges, such as licenses, which, in the securities context, this would include the suspension or bar of a broker from the industry, or prohibition a director or officer of a public company who was involved in fraud.  A “bar” will preclude the person from ever again being a director or officer of a public company, unless it is later modified.

A.  Injunctions

For years the only remedies the SEC sought in the federal courts were injunctions.  The civil injunction appears to be a weak remedy, yet it can be effective when a court order is needed to stop an on-going violation, usually allegations of civil fraud.  A violation of a civil injunction can be a case of criminal contempt.

B.  Disgorgement of Ill-Gotten Monies

Disgorgement in reality refers to obtaining monies that were once given or forwarded to a person or a company, when it is proven that the monies originated from an investor who forwarded them believing that they were investing in a legitimate program.  It is a remedy to prevent unjust enrichment.

C.  Monetary Penalties

In the 1980’s, Congress granted the SEC more power pursuant to the Insider Trading Sanctions Act of 1984.  This resulted in the ability to seek penalties from insider traders of up to three times the amount of illegal profits made by using information that was non-public.

The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 granted the SEC even more power, including the authority to bring federal court cases seeking monetary penalties from any person who violates the federal securities laws. The penalties are assessed according to the degree of violation.

D.  Officer and Director Bars

The SEC also has the authority to ban any person who committed securities fraud from serving as an officer or director of a company that issues public company stock.  This often has the effect of closing a company’s operations.

E.  Cease-and-Desist Orders

The SEC also can impose a cease-and-desist order upon any person who has violated or is about to violate a federal securities law.  It is issued by the SEC by an administrative law judge in an administrative action (as opposed to a federal civil enforcement case). These cases generally require a lesser burden of proof of a possible securities violation in the future.

II. Criminal Prosecutions Generally

“Securities fraud” and other criminal offenses involving securities are prosecuted in federal court as felony offenses, and these offenses are based upon allegations of fraud, sales of securities without a license, and omitting pertinent material in the sale of securities, or insider trading.  When people hear the word “securities,” they often think of stock in a company.  Stock would be considered a security, but the term “security” has a very broad definition in both state and federal statutes, so that investigations in either State court initiated by the State Securities Board, or an equivalent state agency, or by the U.S. Securities and Exchange Commission can cover incidents that involve shares of company stock, promissory notes, bonds, and investment contracts.

Criminal investigations can result in Indictments as in any other criminal case, and the Securities and Exchange Commission has the authority to share information with law enforcement and prosecution authorities.

These investigations can be lengthy, and they are document and financial transaction intensive, and/or they focus on fraudulent sales by the targets of the investigations.

III. Charges and Indictments

Securities fraud and criminal securities offenses in federal cases are found in Title 15 of the United States Code, although many federal criminal offense statutes are listed in Title 18 of the U.S. Code.  Charges in Indictments brought by the U.S. Attorney include:  1) Securities Fraud; 2) Misrepresentation or Omission of Material Facts in the Sale of Securities; 3) Sales of Securities Without a License; 4) Sales of Unregistered Securities; 5) Insider Trading; and/or 6) Money Laundering.

IV. Investigations

Investigations focus to a large extent on financial documents, trading records, and statements and depositions of targets of the investigation.  Often, targets of the investigation will have given statements or depositions to the U.S. Securities and Exchange Commission or the State Securities Board prior to a criminal investigation.  Administrative subpoenas by the government agencies involved in administrative or civil actions may yield records or written communications from the targets of the investigation that is used in the criminal investigation. 

V. Illegal Acts Leading to Charges

The following is a list of allegations and activities that may be the basis for counts in an Indictment in a criminal securities case:

  1. Misrepresentation of company’s financial status and/or stock values.
  2. Misrepresentations in sales of stocks or other securities.
  3. Stock manipulation schemes.
  4. Insider trading (unauthorized information that allows a person to benefit from the purchase and/or sale of stock, stock options or other securities).
  5. Investment contract schemes.
  6. Prime bank note schemes.
  7. “Pump and dump” schemes regarding penny stocks or low value stocks.
  8. Company accountants “pulling revenue forward” to show income not yet received
  9. Sale of unregistered securities.
  10. Sale of securities by an unlicensed broker

VI. Results in Addition to Sentencing in Criminal Cases

In addition to sentencing in a criminal case regarding securities fraud or related securities charges, the following may occur in a related or parallel securities enforcement action by the U.S. Securities and Exchange Commission or the State Securities Board:

  1. Temporary Restraining Orders and Asset Freezes
  2. Permanent Injunctions Against Securities Fraud, Illegal Sales of Securities, or Other Similar Prohibitions
  3. Disgorgement of ill-gotten gains
  4. Civil Money Penalties

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