Securities Fraud: How the Government Calculates

Securities Fraud: How the Government Calculates Penalties

Securities fraud is a serious crime that involves deceiving investors or manipulating financial markets for profit. The government takes securities fraud very seriously, and has implemented laws and regulations to detect, punish, and deter this harmful activity. When securities fraud is uncovered, complex calculations are used to determine the penalties imposed on the perpetrators.

Factors That Increase Penalties

Penalties for securities fraud depend on many factors that make the crime more serious:

• Large number of victims – Frauds inflicting widespread losses warrant stiffer penalties.
• Significant financial loss – The greater the loss caused, the harsher the punishment.
• Vulnerable victims – Penalties increase if victims are seen as particularly vulnerable, like retirees or pension funds.
• Senior corporate role – Executives and directors face harsher fraud penalties than lower-level employees.
• Prior offenses – Repeat offenders are penalized more severely.
• Obstruction of justice – Penalties escalate if the fraudster lied to investigators or destroyed evidence.
• Leader of scheme – Being the mastermind behind a major fraud warrants tougher punishment.

Criminal Penalties for Securities Fraud

Securities fraud carries severe criminal penalties under federal law. Key statutes used to prosecute this crime include:

• Securities Act of 1933 – Up to 5 years imprisonment for falsifying material facts in a securities registration statement.
• Securities Exchange Act of 1934 – Up to 20 years imprisonment for manipulating share prices through fraud.
• Investment Advisers Act of 1940 – Up to 5 years imprisonment for defrauding clients as an investment adviser.
• Sarbanes-Oxley Act of 2002 – Created new criminal penalties for securities fraud, including up to 25 years for destroying evidence.

In addition to possible prison time, criminal penalties can include substantial fines and restitution orders. Jail sentences over 5 years often result in additional supervised release after imprisonment.

SEC Civil Penalties

The Securities and Exchange Commission (SEC) pursues civil enforcement actions against securities fraud violators. Possible SEC remedies include:

• Injunctions – Court orders prohibiting future violations.
• Disgorgement – Repayment of any profits from illegal activity.
• Civil Fines – Monetary fines based on factors like fraud profits gained and losses avoided.
• Bars from Industry – Banning securities law violators from working in the industry again.
• Cease-and-Desist Orders – Requiring violators to stop illegal activity.

Violators can face severe monetary SEC fines. Intentional fraud violations carry fines of up to $200,000 per violation for individuals and $1 million per violation for companies.

Parallel SEC and Criminal Cases

Securities fraud often involves parallel civil SEC and criminal DOJ cases. The SEC focuses on investor protection through civil remedies. Prosecutors pursue criminal convictions and prison sentences.

Settlements in one case can affect the other. Admissions in an SEC settlement may be used as evidence in a criminal trial. This encourages defendants to fight the cases separately.

Cooperation with authorities is encouraged by allowing lighter SEC penalties for criminals who assisted prosecutors. But the SEC still pursues its own separate civil remedies.

Sentencing Guidelines for Fraud

Federal judges use US Sentencing Guidelines to determine prison terms for securities fraud. The guidelines provide a sentencing range based on:

• Base Offense Level – Set at 7 for securities fraud.
• Loss Amount – Increased levels based on total loss from the fraud.
• Victim Number – Higher levels for over 10 victims, or significantly more.
• Sophistication – More complex schemes mean higher offense levels.
• Role – Aggravating role as a leader or organizer of the scheme.
• Obstruction – Increased levels if the offender obstructed justice.

The final offense level leads to a sentencing range in months, over which the judge has some discretion. Prosecutors can request departures from the guidelines in exceptional cases.

Conclusion

Punishing securities fraud requires detailed analysis of victims, losses, and other factors to fit the penalty to the crime. The government has extensive civil and criminal remedies to deter this harmful activity and protect investors. Sophisticated calculations are used to ensure fair and effective penalties for securities fraud violators. However, some critics argue the complexity of the system can still lead to ineffective deterrence and sentencing disparities in similar cases. The law in this area continues evolving to balance punishment, deterrence, and justice.