Securities Fraud Penalties Explained.

Penalties for securities fraud depend on the charging statute(s), the actual loss involved, the number of victims, and the nature of the defendant’s culpability, as well as other factors. Under 18 U.S.C. § 1348, the statute authorizing federal prosecutors to charge “securities and commodities fraud,” eligible penalties include imprisonment for up to 25 years, a fine, or both. Under 15 U.S.C. § 78ff, the statute authorizing criminal enforcement of the Securities Exchange Act, eligible penalties include imprisonment for up to 20 years, a fine (or both), or forfeiture. Fortunately, most federal securities fraud offenses have no mandatory minimum sentence.

While a dataset produced by the DOJ in FY 2024 reports an average sentence of approximately 38 months for “Fraud and Counterfeiting” offenses, this figure is not necessarily a good indicator of the sentence an individual charged with securities fraud will receive in federal court. This is because this dataset covers all types of fraud offenses, not only securities fraud. Furthermore, the dataset does not reflect DOJ and federal sentencing trends from the most recent few years.

The 25-year federal prison sentence imposed on FTX founder Sam Bankman-Fried is a better indicator for individuals facing securities fraud charges where hundreds of millions (or billions) in investor losses are at issue. Elizabeth Holmes, the founder of Theranos, also received a federal prison sentence exceeding 11 years.

Additionally, federal prosecutors and the Securities and Exchange Commission (SEC) can both pursue enforcement proceedings for the same conduct. While most SEC proceedings are civil or administrative in nature, individuals accused of securities fraud may face both financial penalties and federal imprisonment. As the U.S. Department of Justice states, “The DOJ and SEC often work together to pursue parallel proceedings, in which they seek criminal charges and financial penalties and debarment from the securities industry.”

Which Federal Statute Controls the Maximum Criminal Penalty?

Federal prosecutors can pursue criminal securities fraud charges under a number of different statutes, each of which imposes a different maximum penalty. These federal statutes include, among others:

• 18 U.S.C. § 1348, Securities and Commodities Fraud
• 15 U.S.C. § 78ff, Criminal Penalties
• 18 U.S.C. § 1341, Frauds and Swindles (Mail Fraud)
• 18 U.S.C. § 1343, Fraud Relating to Mail or Telecommunication
• 18 U.S.C. § 1344, Bank Fraud
• 18 U.S.C. § 1346, Honest Services Fraud
• 18 U.S.C. § 1347, Healthcare Fraud
• 18 U.S.C. § 1348, Securities Fraud
• 18 U.S.C. § 1349, Attempt and Conspiracy
• 18 U.S.C. § 1956, Laundering of Monetary Instruments

18 U.S.C. § 1348, Securities and Commodities Fraud

Section 1348 imposes criminal securities fraud penalties for “executing or attempting to execute” a scheme aimed to “defraud any person in connection with any commodity or security of a commodity or security, or to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of a commodity or security.”

15 U.S.C. § 78ff, Criminal Penalties

Section 78ff imposes criminal penalties for violations of the Securities Exchange Act of 1934. Importantly, Section 78ff requires that an individual or entity willfully violate the statutory provisions or “knowingly, willfully, and with intent to deceive, manipulate, or defraud” engage in a transaction that is “unlawful or deceptive.

Furthermore, Section 78ff provides a defendant with an affirmative defense in certain cases. A defendant “may avoid imprisonment if he can prove that he did not know that he was violating” any “rule or regulation” and if “ he acted without knowledge of the possibility that such rule or regulation existed.” Section 78ff imposes maximum criminal fines of $5 million for individuals and $25 million for organizations.

18 U.S.C. § 1341, Frauds and Swindles (Mail Fraud)

Section 1341 imposes criminal penalties for “any person who, knowingly uses the mails for the purpose of executing, attempting or conspiring to execute, any scheme or artifice to defraud,” including “any person who, knowingly or with intent to defraud, by means of any postage-paid mail, sends or delivers any letter, note, draft, or check which contains an untrue or fraudulent statement.”

Maximum Criminal Fines

Unlike Section 78ff, the fraud offenses codified at 18 U.S.C. § 1348 do not impose a statutory cap on the amount of fines that federal prosecutors can seek. Instead, these offenses are subject to the general criminal fine provisions of Title 18, including 18 U.S.C. § 3571, which allows federal courts to impose fines that “are equal to the greater of: (1) . . .. the statutory maximum fine for the offense, or (2) the amount of the pecuniary gain to the defendant . . .. or the amount of the pecuniary loss to the victim(s) . . ..” However, these statutory fines are capped “in no event exceeding twice the amount of the gross gain or loss.”

How Do Judges Calculate a Securities Fraud Sentence?

When facing federal securities fraud charges, calculating potential sentences begins with identifying a defendant’s offense level and criminal-history category. The U.S. Sentencing Guidelines use these two factors to establish the recommended sentencing range. Appendix A of the Guidelines, the Statutory Index, refers most fraud offenses to Guidelines § 2B1.1 for calculation of the offense level.

Under Guidelines § 2B1.1, the base offense level is 6 (or 7) in the vast majority of securities fraud cases. With this as a starting point, the judge calculates the total offense level by applying “enhancements” based on specific factors at issue in the case. The calculated total offense level is then used in combination with the defendant’s criminal-history category to identify the range under which a judge may impose a criminal sentence.

Loss Calculations

In fraud cases, loss calculations generally drive the calculated offense level, or Guidelines range. With a base offense level of 6 (or 7), Guidelines § 2B1.1 adds an increasing amount of levels as the amount of loss increases.

For example, in federal securities fraud cases where at least $100 million is at issue, Guidelines § 2B1.1 increases the offense level by a minimum of 24 levels. As noted above, this total offense level will determine the recommended sentencing range under which a judge may impose a criminal sentence.

Sophisticated Means and Other Enhancements

In addition to the loss amount, various other factors can contribute to a federal judge’s calculation of a recommended sentencing range. These factors include:

• “Sophisticated means” are defined in § 2B1.1(b)(2). As a result of the increasing number of federal prosecutors who seek an additional two-level Guidelines enhancement based on the defendant’s use of “sophisticated means,” we are prepared to defend against this enhancement in our clients’ cases.
• Abusing a position of trust can add an additional two levels to the Guidelines calculation of a defendant’s offense level.
• Prior criminal convictions can affect a defendant’s criminal-history category.
• Criminal conspiracies between two or more individuals can affect a defendant’s criminal-history category.
• A “victim is substantial” if the defendant targeted 10 or more victims. This provides the government with the opportunity to seek an additional two-level Guidelines enhancement.
• Use of a computer to facilitate a crime can add two levels to the Guidelines calculation.
• Targeting certain individuals, such as investors over the age of 65, can add two levels to the Guidelines calculation.
• Individuals can also face sentencing “adjustments” based on their acceptance of responsibility.

Concurrent and Consecutive Sentences

While the Guidelines only use the total offense level and the defendant’s criminal-history category to calculate the recommended range for a single offense, in many securities fraud cases, the government seek to impose criminal sentences for multiple offenses. Under 18 U.S.C. § 3584, criminal sentences imposed simultaneously run concurrently unless the judge orders a specific offense to run consecutively. However, under Guidelines § 5G1.2(d), if the sentence on the count carrying the highest statutory maximum is less than the total punishment, the sentences on the remaining counts must run consecutively to the extent necessary to produce the total punishment.

Can the SEC Case Continue Alongside Criminal Charges?

Generally, yes, the SEC will continue to pursue civil and administrative enforcement proceedings in parallel with federal prosecutors’ prosecution of criminal securities fraud charges. While the SEC does not have the authority to pursue criminal charges on its own, it can do so in coordination with the Department of Justice.

The difference between the burden of proof in criminal cases versus civil cases is significant. In order to obtain a criminal conviction for securities fraud, the government must prove beyond a reasonable doubt that the defendant is guilty. The government need only prove the defendant’s civil liability by a preponderance of the evidence, and that standard applies to securities fraud claims as well.

Civil and criminal proceedings for the same conduct do not ordinarily violate the constitutional protection against double jeopardy, which prohibits defendants from being punished twice for the same offense. The Double Jeopardy Clause applies only to criminal punishment and bars multiple criminal prosecutions.

SEC Remedies and Penalties

The remedies and penalties available to the SEC in enforcement proceedings include:

• Civil penalties
• Injunctions
• Disgorgement
• Fines
• Cease-and-desist orders
• Bars and suspensions

Under the Securities Act and Exchange Act, federal courts may assess statutory civil penalties for each proven violation. Statutory civil penalties can be substantial, and the Securities and Exchange Commission (SEC) seeks to enforce these penalties in many securities fraud cases. In addition to statutory penalties, the SEC can also seek to seek disgorgement or restitution against defendants in cases involving securities fraud.

Jury Trial Rights in SEC Enforcement Actions

The U.S. Supreme Court recently recognized jury trial rights for SEC cases where the agency seeks “civil penalties” (including those “based on the profits that violate the rule,” disgorgement “of ‘ill-gotten’ gains,” and statutory “civil penalties” payable to the Treasury). In SEC v. Jarkesy, 603 U.S. 109 (2024) (No. 22-859), the Supreme Court said:

• “If the SEC seeks to enforce one of its many ‘civil penalties’ as defined above, defendants are entitled to a jury trial in federal court . . .. If the SEC does not seek the enforcement of these ‘civil penalties’ in federal court, a jury trial does not lie. In either case, the jury trial right does not affect other enforcement proceedings and does not extend to each instance where the SEC seeks enforcement of a rule violation . . ..”
• “The decision above does not establish, but only declines to address, whether jury trial rights attach to all statutory violations. While we establish a rule applicable to all cases, that rule only applies to cases where the SEC pursues civil penalties.”

As a result of the decision in Jarkesy, the SEC is generally prohibited from pursuing civil enforcement proceedings without a jury trial for cases in which the agency seeks civil penalties.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

How Do Fines, Restitution, Forfeiture, and Disgorgement Work?

Disgorgement and Forfeiture

Under the Securities Exchange Act, the SEC can seek disgorgement of disgorgement “and any interest thereon of any profit gained or loss avoided as a result of a violation of section 10(b) or 15(c) of this title or any rule or regulation promulgated thereunder by the SEC.” While disgorgement has historically been applied in the same manner as equitable relief, Liu v. SEC, 591 U.S. 71, 140 S. Ct. 1936 (2020) on the SEC’s ability to seek disgorgement. In Liu, the Supreme Court stated, “Equitable disgorgement is intended to peel away the wrongdoer’s unlawful profits, not to punish the wrongdoer.” As a result, Liu limits equitable disgorgement to net profits after allowing for offsets for legitimate expenses.

Similar to disgorgement, the government can seek criminal forfeiture of proceeds traceable to the offense under 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c). The DOJ restored the authority to use assets recovered through forfeiture to provide restitution to victims of securities fraud under 28 U.S.C. § 2461(c)(12)(C)(ii), which provides, “If the amount of monetary losses is greater than the value of the defendant’s forfeited property, the forfeited property shall be applied to satisfy a restitution order under 22 U.S.C. § 3664.”

Restitution

Under the Mandatory Victims Restitution Act (MVRA), restitution is required for crimes that qualifying as federal property offenses (which includes federal fraud offenses) “under this section . .. regardless of the defendant’s ability to pay, including by deducting from the amount of restitution any loss for which the victim has received compensation.”

Importantly, when calculating the amount of restitution owed to the victims, courts do not ordinarily regard the defendant’s current economic circumstances as a factor. When sentencing defendants for federal securities fraud, this is significant because it is often the case that the profits from the commission of the underlying securities fraud have been spent or lost before sentencing. As a result of 18 U.S.C. § 3664(j)(2) providing, “The defendant’s restitution obligation under this section shall be offset by any compensation that the victim receives after the date of the entry of a restitution order . . .. as the result of any civil lawsuit or litigation,” it is not impossible to avoid criminal restitution.

Fines

Unlike restitution, which can also be imposed in securities fraud cases, 18 U.S.C. § 3572 mandates that “the court consider, upon request, the defendant’s ability to pay, or inability to pay, a fine when determining the amount of any fine it may impose.”

Furthermore, when criminal restitution and fines both apply, and the amount of restitution owed is not easily digestible based on the defendant’s financial resources, 18 U.S.C. § 3572 also provides: “If the amount of restitution exceeds the defendant’s ability to pay, and the court finds that a fine would be duplicative, then the court should deny a fine.” This section, combined with the restrictions on criminal fines, creates significant grounds for challenging the imposition of fines when restitution is not fully payable.

Can Companies and Licensed Professionals Face Separate Penalties?

Companies

When companies face federal prosecution for securities fraud, sentencing is governed by Chapter Eight of the U.S. Sentencing Guidelines. Under Guidelines § 8C2.5(f), companies’ culpability scores can be reduced “if it can be determined that the organization had an effective compliance program . . .. and that such effective compliance program was not effective exclusively to the organizational defendant’s knowledge . . .. in light of all the pertinent circumstances . . ..” Company compliance can present a unique challenge in many aspects of the defense process, and we are experienced in negotiating company compliance issues as part of our clients’ corporate resolutions. This includes negotiating requirements for independent monitors.

While companies may also face criminal penalties for securities fraud, criminal liability for corporate defendants is generally limited to the company’s criminal conduct to the extent a court finds that the conduct was committed by an employee acting within the scope of his or her employment and, at least, the company’s “benefit.” In the company’s defense against charges of corporate criminal liability, it is sufficient in many cases to challenge the scope of employment of the agent or showing that the organization received no benefit.

Licensed Professionals

Individuals licensed by the SEC, FINRA, and the states may face the revocation of a business license, a bar on continuing to practice, or a temporary suspension in order to prevent future access to clients’ assets. These administrative or civil penalties are, in addition to criminal fines and restitution if the individual is also criminally convicted in the parallel criminal proceedings, often a part of the overall risk of facing enforcement for securities fraud.

The DOJ and SEC’s parallel proceedings can result in the imposition of associative bars, which restricts an individual’s ability to work with regulated securities firms and financial markets. An associative bar also does not immunize an individual against state and self-regulatory organizational (SRO) licensing or disciplinary proceedings. While the DOJ and SEC may reach an enforcement settlement with a defendant, the settlement agreement generally does not resolve FINRA licensing proceedings, pending FINRA litigation, or state licensing issues.

Publicly Traded Companies

Finally, the SEC can also seek to impose “ officer and director bars” in addition to targeting a company’s ability to issue a public security or to be listed on a national exchange. This is part of the SEC’s ability to enjoin a company’s representatives from continuing to engage in violation of the federal securities laws. Under the Securities Exchange Act, a federal court can order a company’s officers and directors be barred from working for publicly traded companies “if its conduct demonstrates unfitness to serve as an officer or director in the future.”

How Long Can the DOJ or SEC Wait Before Filing Charges?

The statute of limitations for a criminal securities fraud charge is generally six years under 18 U.S.C. § 3301. The statute of limitations for a civil or administrative SEC enforcement proceeding is generally five years under 28 U.S.C. § 2462. However, there are several exceptions, including exceptions related to the government’s authority to seek disgorgement.

Exceptions

The statute of limitations for disgorgement claims in securities-fraud cases was extended in 2021 to:

• Ten years for scienter-based claims under Section 78u(d)(8)
• Five years for all other disgorgement claims under Section 78u(d)(8)

Additionally, under Section 78u(d)(8), a ten-year statute of limitations applies to “specified equitable remedies,” which include seeking an injunction. A federal court can grant injunctive relief against a defendant “whenever . . .. any person violates or attempts to violate, any provision of this section, or any rule or regulation promulgated under this section.” If the SEC is unable to impose a statutory penalty, it may still be able to obtain injunctive relief if the statute of limitations has not run.

Tolling Agreements

The government will attempt to toll the statute of limitations by including “tolling provisions” in criminal plea and civil enforcement settlement agreements. An individual or entity can also be asked to enter a tolling agreement with the DOJ and/or the SEC while trying to reach a negotiated resolution with these government entities prior to the formal filing of criminal or civil charges. If a defendant does not consent to toll the statute of limitations, however, federal prosecutors and the SEC must establish that the statute is tolled by other means. These means include showing a violation of the federal securities laws happened over an extended period of time, showing the defendant intentionally misled the government during the investigation, or showing that the government had not yet filed charges due to complexities in conducting a securities fraud investigation.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.