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There’s no shortage of ways to make money in the world of securities trading, but if you do get involved in the markets, it’s important to carefully follow federal regulations.

If you fail to do so, you could be charged with securities fraud.

“Securities fraud” is an umbrella term, which refers to a number of crimes that are usually investigated by the U.S. Securities and Exchange Commission. While each type of securities fraud is different, one trait they all have in common is the use of deceptive or fraudulent practices to obtain money from someone who is attempting to make an investment.

While we think that only financial officers within corporations or professional traders can be guilty of securities fraud, the truth is that anyone can be convicted.

Securities fraud is a federal crime, and it carries substantial penalties. Depending on the facts of your case and the charges against you, prison sentences can range as high as five years for each count, as well as fines as high as $5 million.

What is securities fraud?

For the purposes of understanding securities fraud, we’ll define a security as any type of investable financial instrument. That includes stocks, bonds, options, derivatives or bank notes, to name a few. Securities fraud, then, is when anyone involved with one of these financial instruments lies, cheats or steals to obtain money from someone else.

Here are some of the most common examples of securities fraud:

  • “Pump and dump” or “Short and distort” – Taking a position in a security and then spreading deceptive information published via email, chat, blogging, etc to influence others to follow. As the price changes, the fraudster closes their position at a profit.
  • Insider trading – Trading securities based on non-public information about a company.
  • Boiler rooms – Use of high-pressure and deceptive sales tactics to sell so-called “penny stocks” or other low value investments.
  • Ponzi schemes – Selling investors equity stakes in a non-existent company, and then using funds from future investments to fund returns for earlier investors.
  • Dummy corporations – Creating a false company and selling nonexistent equity stakes to investors.

Brokers must also be careful to avoid any suspicion of securities fraud. This might include situations such as:

  • Unauthorized trades – Making trades without the client’s permission (unless explicitly allowed per a written contract or agreement).
  • Unsuitability – Making investments that are not right for the client’s particular needs, or making investments without informing the client of the risk involved.
  • Churning – Selling or purchasing securities to gain excess commission.
  • Over-concentration – Placing a vast majority of a client’s funds in one investment.
  • Creating illegal accounts – Creating a fake account or putting a client’s funds into one’s own account.

How do I know if I’m under investigation for securities fraud?

Federal investigations usually begin in secret. After all, it’s easiest for a federal agent to collect evidence if the target of their case doesn’t suspect that they’re under investigation. Federal agents use tools like wiretaps, subpoenas and computer forensics to initially investigate suspected cases of securities fraud.

After this phase is complete, if the agents still believe that a crime was committed, they might execute a search of an office or someone’s home, or they might begin interviewing people. This is usually when most people find out that they are involved in a federal investigation. 

There are three types of involvement in federal cases:

  • Witness – Someone who might have important information. Usually, the government does not believe this person was involved in committing the crime under investigation.
  • Subject – There is evidence that this person might have been involved in committing a federal crime, so they are included in the scope of investigation.
  • Target – There is substantial evidence that this person committed a federal crime, and this person is a focal point for the investigation.

One thing to keep in mind is that, as government agents begin conducting interviews or executing search warrants, they have already gathered substantial evidence in the case.

Investigators typically don’t reveal all of the information they know, instead using tactics to extract it from the people that they are interviewing. This can lead to a common pitfall for people who fall in the “witness” or “subject” categories. 

As an example, let’s say early one morning, federal investigators knock on the door of Sam, a now-retired hedge fund manager. Members of his old fund were involved in insider trading, but Sam didn’t personally participate. This would make him a “witness.” Investigators begin asking Sam about details of life at the firm, and flustered by the stress of dealing with federal agents, Sam misremembers a number of details. The federal agents have gathered hard evidence beforehand that shows otherwise, so Sam could now be at risk of being included in the investigation as a “subject” because he wasn’t forthright with investigators, as well as receiving separate charges for lying to federal investigators.

Even if you know that you weren’t involved in any fraudulent activity, if you are approached by federal investigators at any time, you are fully within your rights to firmly but politely inform them that you would love to do an interview – after speaking with your attorney. Your attorney can help you prepare, telling you what to say and what not to say, and help guide you through this.

Defenses against securities fraud charges

If you believe that your or someone you know is involved in a federal securities fraud investigation, it’s important to speak with an attorney as soon as possible.

“Mr. Helfend absolutely saved my bacon. After finding myself charged with fraud, I was terrified. I have never been introduced to the legal system from this side before, and it was unsettling. However, Robert was able to calm me down and help me figure out my situation. He even got the case dropped before trial! I don’t want to be in another situation where I need a criminal defense lawyer, but if I ever am, I know who I will call!”Pete, CA

As we mentioned above, the government likes to gather information in secret. It has virtually infinite resources to uncover evidence in cases where it believes a crime has been committed. Then, only when the government has gathered a substantial amount of evidence will someone find out that they are involved in a federal investigation.

Because of this, the federal government has a natural advantage. By the time you find out you are involved in a federal investigation, it has already developed a plan of attack and a strategy toward prosecuting its case.

By speaking with an attorney, you can better understand your options, and if you are involved as a subject or target, you can begin formulating your defense. Even with all of its investigative firepower, the government still has to prove beyond a reasonable doubt that you were guilty of committing securities fraud. A skilled federal criminal defense attorney can comb through the evidence in your case and expose flaws in the government’s arguments.

Robert M. Helfend is a veteran federal criminal defense attorney, based in Los Angeles but serving clients nationwide. He has practiced since 1984, securing thousands of favorable judgments for his clients in that time. He is listed on the prestigious SuperLawyers, National Trial Lawyers Top 100 and Lead Counsel lists. Call today for your free case evaluation – 800-834-6434.

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