How to Defend Against Securities Fraud Charges.

• SEC vs. DOJ. The SEC is an administrative agency; the DOJ is the executive branch and is responsible for criminal prosecutions. SEC investigations are civil in nature, and SEC enforcement proceedings are civil or administrative. The DOJ, however, can initiate a parallel criminal investigation.
• Burden of Proof. Prosecutors must prove all elements of every federal securities fraud charge beyond a reasonable doubt. Defendants need not prove their innocence, or anything else.
• Opportunities for Defense Advocacy. Federal securities fraud defense begins immediately during an investigation. It can continue during pretrial proceedings, trial, or on appeal.
• Civil or Administrative Liability. It may be possible to face civil or administrative liability without facing criminal culpability. It may also be possible to be cleared of criminal culpability.
• Potential Defenses. The specific defenses that are available will depend on the specific statute(s) under which a defendant is charged, and the defendant’s conduct. An experienced securities fraud defense lawyer can evaluate the case’s evidence and help a defendant make informed decisions about their defense strategy.
• Federal Rule of Criminal Procedure 18. Federal Rule of Criminal Procedure 18 states that generally, a defendant should be tried in a district where the offense, or any part of the offense, was committed.
• SEC Defense Work. SEC defense work can include interviews, testimony, proffers, responses to SEC subpoenas, responses to SEC interrogatories, and Wells submissions.

What happens during an SEC securities investigation?

During an SEC securities investigation, a party or firm may be at risk of civil or administrative liability. Unlike the DOJ, the SEC does not have the authority to bring criminal charges. However, it is not uncommon for the SEC to work in tandem with the DOJ to investigate potential securities fraud violations. The SEC may have evidence that supports criminal allegations, and in those cases, the SEC may refer the matter to the DOJ for further investigation. The DOJ may initiate its own investigation and could file criminal charges even if the SEC concludes that it does not want to take administrative or civil enforcement action. When defending against an SEC investigation, it is important to remember that even if there is no criminal culpability, civil and administrative liability may still pose a significant risk. In all cases, early intervention by a federal securities fraud defense attorney is essential. The attorney can defend your interests and work to protect you from facing liability during the investigation stage.

What is a Wells notice and Wells submission?

A Wells notice is an official communication from the SEC staff stating that the staff’s preliminary findings warrant a referral to the SEC Commission for enforcement action. After the issuance of a Wells notice, you have the opportunity to file a Wells submission, which is a written statement designed to persuade the SEC staff not to take enforcement action or to argue that any alleged violations were not serious enough to warrant a recommendation to the Commission. If you received a Wells notice, you should reach out to an experienced defense attorney right away.

How do SEC examinations differ from SEC investigations?

SEC examinations are not filed enforcement proceedings. Instead, they are compliance reviews conducted by the SEC’s Division of Examinations. They are often conducted regularly to ensure that companies are compliant with applicable federal securities laws and regulations. However, the findings resulting from a compliance examination could lead to a referral to the SEC’s Enforcement Division if the examination uncovers a serious violation that warrants an investigation into the alleged misconduct.

What is an informal SEC inquiry?

An informal SEC inquiry is a request for voluntary cooperation. In this stage of an inquiry, the SEC staff does not have subpoena power, so they cannot require production of records or testimony from a target or subject of the inquiry. While the SEC does not have the authority to compel cooperation, you should not assume that you have no obligations. Instead, you should speak with an experienced defense attorney to determine whether you should provide cooperation.

What is a formal SEC order of investigation?

A formal SEC order is what formally initiates a formal SEC investigation. A formal order allows the SEC to exercise its subpoena power, which gives it the authority to compel testimony in sworn statements, production of records, and other documents. A formal order authorizes the SEC's formal investigation and subpoena power; it may lead to an administrative or civil enforcement proceeding against the party targeted by the order.

What happens if the SEC files an enforcement action?

Once the SEC files an enforcement action against a person or company, the enforcement action proceeds in either federal court or in an administrative proceeding before an administrative law judge. In both cases, the outcome of the proceeding can include fines, disgorgement of profits, or restrictions on future employment in the financial industry. Some enforcement actions may also be prosecuted civilly or administratively in the same court system.

What Must Prosecutors Prove in a Securities Fraud Case?

In a federal securities fraud case, a defense lawyer can focus on challenging whether the government’s evidence is enough to prove every element of a charged violation. Many of the laws that govern securities fraud are complex, and the government must meet its burden of proof with respect to each one. For example, in a case involving alleged criminal violations of 18 U.S.C. § 1348, the government must show that a defendant “knowingly executed, or attempted to execute, a scheme or artifice, (i) to defraud any person in connection with any commodity for cash or any securities, or (ii) to obtain any money or property by means of false or fraudulent pretenses, representations, or promises in connection with the purchase or sale of any security.”

The government must meet its burden of proof with respect to the specific elements of any other applicable securities fraud statute as well. In federal securities fraud prosecutions, the government often charges multiple crimes, and in many cases it may be possible to seek dismissals in pretrial proceedings in federal court if the prosecution does not meet its burden for any of these counts.

When Does Rule 10b-5 Apply?

SEC Rule 10b-5 applies in three different scenarios:

• “A deceptive device or scheme that has been employed in connection with the purchase or sale of any security,”
• “A material misstatement or omission by a person to deceive another person,” and
• “Any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”

Rule 10b-5 is limited in scope, as it applies only in connection with securities transactions (i.e., the “purchase or sale of any security”) and does not apply generally to fraud or deceit.

When Does 15 U.S.C. § 78ff(a) Apply?

Section 32(a) of the U.S. Exchange Act (codified at 15 U.S.C. § 78ff(a)) is a criminal securities fraud statute that can be used by the DOJ in connection with Rule 10b-5. The statute imposing criminal liability requires that a defendant knowingly commit violations of Rule 10b-5, with the added requirement of willfulness. A defense lawyer can focus on challenging willfulness as a defense to Rule 10b-5 criminal charges.

What Are Common Defenses to Securities Fraud Charges?

A defense attorney can assist a client by focusing on a variety of defenses to securities fraud charges. For example, while U.S.C. § 1348 requires that a defendant knowingly executes a scheme to defraud, it does not require proof of intent to commit a crime. As a result, a defendant who is charged under this statute can argue that his or her conduct was inadvertent and that he or she lacked the scienter (i.e., intent) needed for a conviction. A common example of inadvertent conduct in securities fraud cases is when a mistake or oversight leads to allegations of fraud; and, while prosecutors may argue that the defendant committed a fraudulent act, a strong defense can focus on the defendant’s intent not to defraud.

What Evidence and Expert Witnesses Are Used in Securities Fraud Cases?

Many types of evidence are at issue in securities fraud cases. Prosecutors must prove that there was a “deceptive device or scheme,” “material misstatement or omission,” or other fraudulent activity; and, a defense lawyer can fight this by arguing that the evidence does not show fraud. The government may need to use expert witnesses to address issues such as:

• Accounting practices and appropriate accounting treatment,
• Valuation of stocks and other securities,
• Trading patterns or volatility,
• Materiality of alleged misstatements, and
• Causation of financial losses (i.e., whether alleged fraudulent conduct led to losses).

Which Allegations Do Not Amount to Securities Fraud?

To support allegations of securities fraud, the asset, instrument, or other property involved must be a “security” under the applicable federal securities laws and regulations. If the asset, instrument, or property involved is not a security, then defendants facing allegations of criminal securities fraud should be able to challenge the legal sufficiency of the allegations.

Similar to how prosecutors’ ability to secure a conviction for a criminal offense differs from a private plaintiff’s ability to establish a private right of action under Rule 10b-5, defendants facing charges under Rule 10b-5 in a criminal prosecution have different defense strategies than those facing private litigation. A significant difference involves the element of causation. If a private party sues under Rule 10b-5 (e.g., in class action litigation), the private party’s lawyers must prove reliance, actual economic loss, and loss causation. These elements are not requirements for establishing liability for criminal securities fraud; and, the government is not required to prove these elements to secure a conviction. When defending against allegations of securities fraud in federal court, our lawyers will be able to make use of these legal differences in order to fight these allegations. While the government does not need to establish reliance, actual economic loss, or loss causation to secure a criminal conviction, these elements may still play a role in criminal prosecutions; and, as a result, it is also important to ensure that prosecutors are not mischaracterizing the burden of proof in order to secure a conviction.

While Section 5 of the Securities Act imposes liability for failure to register securities offerings in many cases without a requirement of fraud, it does not impose civil or criminal liability for all fraudulent conduct involving securities and the sale thereof.

Section 15(a) of the Exchange Act applies to those engaged in selling securities “for compensation.” An issuer selling its own securities is not generally required to register as a broker, and it does not typically engage in securities trading “for compensation.” While issuers selling their own securities may need to comply with the Exchange Act, the statutory definition of a broker typically does not encompass issuers and other securities issuers.

Generally, the execution of unauthorized or unsuitable trades may be a form of fraud or deceit under the Securities Exchange Act, but unauthorized or unsuitable trades will not necessarily lead to criminal charges. This is true even in the context of criminal securities fraud prosecutions. For example, unauthorized or unsuitable trades may prompt regulatory allegations against brokers, investment advisors, and other financial professionals, but the execution of an unauthorized trade does not automatically establish all elements of a criminal securities fraud offense. Our federal securities fraud defense lawyers will be able to defend against allegations of unauthorized or unsuitable trades. In many cases, unauthorized or unsuitable trades will lead to regulatory allegations against brokers, investment advisors, and other financial professionals, and it is important for defendants in these cases to make informed decisions about their defense strategy.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

How Do I Preserve Evidence Without Surrendering My Rights?

When Do I Have a Duty to Preserve Evidence?

While plaintiffs and the government must rely on the rules of procedure when requesting evidence, defendants often have an independent duty to preserve evidence. This is the case when the defendant has a “reasonable anticipation” of litigation or investigation. Importantly, this duty requires a defendant to preserve and produce all evidence that is in his or her “possession, custody, or control.” In order to preserve the integrity of the legal process, federal authorities may pursue charges for the unlawful destruction of records, and this is true when records are either preserved or destroyed improperly.

What is U.S.C. § 1519?

18 U.S.C. § 1519 is a broad federal statute that imposes criminal liability for the unlawful destruction of records. The statute imposes criminal penalties for “knowingly” destroying, altering, falsifying, or concealing any record, document, or tangible object with the intent to impede, obstruct, or influence a federal investigation.

The DOJ often employs this statute to target records destruction and document spoliation, and it imposes liability regardless of whether there are specific requirements to preserve evidence. A common misunderstanding among executives and other defendants facing federal criminal prosecution is that they cannot face liability for destroying or altering records unless they received a specific document request (e.g., a subpoena). To avoid liability under this statute, it is crucial for executives and other defendants to work closely with their legal counsel to preserve and produce documents properly.

What Documents and Other Information are Protected by the Fifth Amendment?

The Fifth Amendment protects both testimonial and non-testimonial information, but only in certain circumstances. A request for an individual’s testimony invokes the Fifth Amendment’s protection against compelled testimonial communications; and, as a result, the privilege applies to both requested testimonial statements and requested documents. Federal court findings indicate that the privilege extends to documents that can be described as the product of “custodial act or storage of one’s thoughts,” and this includes written notes and other records that are otherwise protected when individuals testify orally. However, the Fifth Amendment does not generally apply to documents that are not a “custodial act or storage of one’s thoughts.” Therefore, individuals are not always entitled to refuse to produce documents requested by federal authorities.

Are There Other Ways to Protect Information in Document Production?

Besides the Fifth Amendment, privilege under the federal rules of evidence and the federal rules of criminal procedure generally allows for protection of information and documents from disclosure. This includes confidential legal advice, which is protected in most cases, and the underlying facts. While the attorney-client relationship is presumed to be confidential, it remains to be seen to what extent the Attorney-Client Relationship Privilege Agreement protects or will protect clients under the laws of the federal district courts in Washington D.C.

The Client-Lawyer Privilege protects the records of a client’s legal advice and communications. When clients engage their law firms to preserve and produce records to federal authorities, clients can rely on the Client-Lawyer Privilege to avoid disclosure of confidential communications. As with many other privilege rights and defenses, it is imperative for clients in criminal securities fraud cases to work with experienced federal securities fraud defense lawyers in order to make informed decisions about when to preserve and when to destroy records.

What deadlines and settlement risks could change my defense?

What Deadlines Affect Federal Securities Fraud Cases?

Depending on the defendant’s exposure and the specific federal securities fraud statute, federal securities fraud charges will be subject to the applicable limitations deadline. Under U.S.C. § 3301, the deadline for “the following” listed offenses, which includes many of the substantive federal offenses commonly prosecuted for securities fraud, is six years. This is not a permanent bar to prosecution, as a tolling agreement can preserve claims beyond an otherwise applicable limitations deadline.

Generally, if a federal securities enforcement action does not result in a criminal case, the government must institute civil or administrative enforcement proceedings before the five-year statute of limitations deadline established under U.S.C. § 2462. Like the limitations deadline for criminal cases, a tolling agreement can preserve the government’s authority to pursue a civil or administrative case even after this limitations deadline.

As SEC investigations are civil in nature, plaintiffs’ lawyers can also pursue private lawsuits against the party under investigation. This includes private Rule 10b-5 cases, which are also subject to five-year limitations deadlines (for securities transactions). The limitations deadline may change if the underlying federal security has been delisted or if the defendant failed to file required documents.

What Are the Risks of a Settlement or PLEA Agreement in a Securities Fraud Case?

As a result of the risks of facing federal charges, many defendants in federal securities fraud cases will settle their civil or administrative cases. While an SEC settlement may resolve administrative issues, it can have other effects. Under 15 U.S.C. § 78u(d)(1), the SEC can seek federal-court injunctions upon a proper showing that a person is engaged in or is about to engage in a violation of the federal securities laws. In addition, 15 U.S.C. § 78u(d)(2) authorizes civil officer-and-director bars for a variety of qualifying violations. Moreover, a filed SEC enforcement action can lead to shareholder, customer, or other collateral litigation.

What Could Trigger Collateral Civil or Criminal Litigation in an SEC Settlement?

While an SEC settlement resolves administrative liability, it may have unexpected consequences. For example, defendants settling in an SEC enforcement case may still be at risk of facing liability under the Insider Trading and Securities Fraud Enforcement Act of 1988 or the Exchange Act. While an SEC settlement can affect a parallel criminal case, a plea agreement in a criminal case does not necessarily resolve any outstanding civil or administrative liability. An SEC settlement does not necessarily resolve any pending or future parallel criminal investigation.

How Serious Are the Penalties for Conviction in a Federal Securities Fraud Case?

Federal securities fraud cases have the potential to result in significant penalties, and they can have the potential to lead to prison time. For example, in federal criminal cases involving alleged violations of 18 U.S.C. § 1348, defendants could be sentenced to a maximum of 25 years of federal imprisonment.

How Much Does a Federal Securities Fraud Defense Cost?

Our federal securities fraud defense attorneys’ fees are either hourly or flat, and they are capped based on the stages of our clients’ cases. We often charge for discovery, trial, and appellate representation as separate blocks of litigation.

While many of our federal securities fraud defense attorneys work on retainer, this is not necessarily indicative of the total cost of a securities fraud defense. While a client’s advance retainer will go toward securing professional services (i.e., hours of attorney time billed at the attorney’s billing rate), this fee doesn’t account for how long the case will last, how much discovery will take, how many experts will be required, whether a trial will be necessary, or if parallel civil or administrative proceedings are at issue. These factors, among others, can impact the final total cost of a securities fraud defense.

Is the “80/20 Rule for Lawyers” the Basis of a Federal Securities Fraud Defense?

The term “80/20 rule for lawyers” does not have a particular meaning when it comes to securities fraud defense. We do not use this concept in our practice.

When Will a Defendant Be Able to Invoke Their Rights to Advancement or Indemnification?

If a defendant is targeted in a securities fraud investigation, the defendant may have the right to advance legal fees or to receive indemnification after the investigation concludes. While the right to advance legal fees and receive indemnification often exists, it does not apply in all cases. The right to advance fees or to be indemnified depends on the governing law, the defendant’s organizational documents, or applicable contracts.

Will a D&O Policy Pay for the Cost of a Federal Securities Fraud Defense?

D&O policies have various notice, consent, and exclusion provisions. For example, the policy may require prompt notice to the carrier or the carrier’s consent in order to invoke coverage. As a result, defendants should speak with experienced counsel about whether their policy will pay for their defense.

Do I Have to Pay Back Advanced Legal Fees?

If a defendant is found guilty of a crime (i.e. a criminal case), this makes the defendant ineligible for indemnification and requires repayment of any advanced fees under the law. This is also true for Delaware advanced legal fees; while the defendant can advance fees, if he or she is ultimately not entitled to indemnification due to a qualifying violation under the law, the defendant must repay any advanced legal fees.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.