Securities Fraud Charges: An Overview of the Potential Penalties

Securities Fraud Charges: An Overview of the Potential Penalties

Securities fraud is a very serious crime that can lead to severe penalties. This article provides an overview of securities fraud charges, the laws governing securities fraud, the agencies that enforce these laws, the penalties for violating securities laws, and defense strategies.

What is Securities Fraud?

Securities fraud refers to deceptive practices in connection with the offer, purchase, or sale of any security or investment product. This includes stocks, bonds, mutual funds, and other investment vehicles. Securities fraud often involves providing false or misleading information to investors in order to manipulate the market price of a security.Some examples of securities fraud include:

  • Insider trading – Buying or selling securities based on material, non-public information.
  • Accounting fraud – Intentionally reporting false or misleading financial information.
  • Pump and dump schemes – Artificially inflating the price of a stock through false or misleading positive statements, then selling shares while the price is high.
  • Churning – Excessive trading by a broker in a client’s account to generate commissions.
  • Misrepresentations – Lying to investors or clients about investment risks, expected returns, or other details.

Securities fraud can be committed by brokers, investment advisors, company executives, auditors, or anyone else involved in the securities markets. The victims are often shareholders who lose money on investments due to the fraudulent practices.

Securities Fraud Laws and Regulations

Several laws and regulations at both the federal and state level prohibit securities fraud and provide penalties:

Federal Laws

  • Securities Act of 1933 – The first major federal securities law. Requires full and fair disclosure of information in initial public offerings. Prohibits misrepresentations and other fraud in the sale of securities.
  • Securities Exchange Act of 1934 – Created the SEC. Requires periodic reporting by publicly traded companies and regulates securities brokers/dealers, exchanges, and SROs. Prohibits market manipulation and fraud in the purchase/sale of securities.
  • Investment Advisers Act of 1940 – Regulates investment advisers. Prohibits fraud by advisers in transactions with their clients.
  • Investment Company Act of 1940 – Regulates mutual funds and other investment companies. Prohibits fraud in the sale of investment company shares.
  • Sarbanes-Oxley Act of 2002 – Increased corporate governance requirements and penalties for securities fraud. Created the PCAOB to oversee public accounting firms.

State Laws

  • State Securities Acts – Known as “Blue Sky” laws. Regulate securities offerings and brokers/dealers within each state. Prohibit fraud and misrepresentations in securities transactions.
  • State Investment Adviser Laws – Regulate investment adviser registration and licensing at the state level. Prohibit adviser fraud and require disclosures.

Securities Fraud Enforcement Agencies

Several government agencies enforce securities laws and investigate cases of securities fraud at the federal and state level:

  • SEC – The Securities and Exchange Commission is the primary regulator of U.S. securities markets. The SEC has civil enforcement authority to investigate securities law violations and bring civil charges.
  • DOJ – The Department of Justice has criminal enforcement authority over securities fraud cases. The DOJ can pursue criminal charges for egregious violations.
  • State Securities Regulators – Agencies like the Texas State Securities Board regulate securities within their state. They can investigate fraud and bring both civil and criminal charges under state law.
  • FINRA – The Financial Industry Regulatory Authority is an SRO that oversees brokers and brokerage firms. FINRA can bring disciplinary actions against brokers.
  • PCAOB – The Public Company Accounting Oversight Board oversees accounting firms. They investigate fraud and violations by auditors.

Penalties for Securities Fraud

The penalties for securities fraud depend on the severity of the violation, whether charges are civil or criminal, and the enforcing agency. However, penalties can be very substantial.

SEC Civil Penalties

For civil charges, the SEC can seek the following remedies:

  • Fines – The SEC often imposes fines on individuals or companies charged with securities fraud. They take into account factors like the egregiousness of the fraud, investor losses, and ability to pay. Fines can range from thousands to millions of dollars.
  • Disgorgement – Defendants may be ordered to repay any profits or ill-gotten gains from their violations. This is meant to prevent unjust enrichment.
  • Injunctions – The SEC frequently seeks permanent or temporary injunctions to prevent future securities law violations. This may include a ban from working in the industry.
  • Bars from Serving as Officer/Director – The SEC can bar individuals from serving as officers or directors of public companies if they violated anti-fraud provisions.

DOJ Criminal Penalties

For criminal cases, the DOJ can pursue:

  • Prison Sentences – Securities fraud involving sizable investor losses, repetitive misconduct, or other aggravating factors can warrant prison sentences up to 25 years.
  • Fines – Criminal fines are often much larger than civil fines. Individuals can face fines up to $5 million, while companies can be fined up to $25 million.
  • Probation – Courts may impose probationary periods up to 5 years following a prison sentence. This includes close supervision of the defendant’s activities.
  • Forfeiture – The gains from securities fraud may be seized by the government through criminal or civil forfeiture proceedings.

State Regulator Penalties

State securities regulators have similar civil and criminal penalty options under state securities laws:

  • Fines – Civil fines up to $10,000 per violation or criminal fines up to $20,000 per violation.
  • Injunctions – Permanently ban defendants from selling or dealing in securities within the state.
  • License/Registration Revocation – Revoke the licenses or registrations of brokers and investment advisers who commit fraud.
  • Imprisonment – Prison sentences under state law, often up to 10 years per violation.
  • Restitution – Require the repayment of victims for their monetary losses from the fraud.

Defenses Against Securities Fraud Charges

There are several potential defenses that may be effective in contesting securities fraud charges:

  • Lack of intent – Securities fraud requires proof of intent to defraud or willful/reckless misconduct. The defense may argue the defendant acted in good faith without intent to deceive.
  • Reliance on professionals – Demonstrating good faith reliance on attorneys, accountants, brokers, or other professionals regarding disclosure obligations or sales practices.
  • Statute of limitations – Civil and criminal charges must be brought within a certain time limit following the alleged fraud. Dismissal may be warranted if that time period has expired.
  • Compliance procedures – Implementing and enforcing reasonable policies and procedures to prevent securities law violations may help demonstrate a lack of intent.
  • No duty owed – Defendants may claim they did not owe a legal duty to the allegedly defrauded party. For example, a company executive arguing they had no duty to disclose information to certain shareholders.

An experienced securities fraud defense attorney can assess the merits of potential defenses and formulate the most effective defense strategy when facing civil or criminal charges. They will also negotiate with regulators to secure the most favorable settlement terms possible. The stakes are high, so skilled legal representation is critical when dealing with securities fraud allegations.


Securities fraud covers a wide array of deceptive practices that cause investor losses. Major federal statutes like the Securities Act of 1933 and the Securities Exchange Act of 1934 prohibit fraud in the markets. State laws also impose liability.Violations can lead to substantial civil fines and disgorgement of profits through SEC enforcement actions. Criminal penalties like lengthy prison sentences and sizable fines can result from DOJ prosecutions. State regulators have similar civil and criminal remedies.But all hope is not lost when facing securities fraud charges. Raising defenses like lack of intent, good faith reliance on professionals, or expiration of the statute of limitations may defeat allegations. Retaining experienced securities fraud defense counsel can help mitigate penalties and even avoid convictions in appropriate cases. Their skilled advocacy can make a major difference in the outcome when serious securities fraud charges are levied.