Federal Securities Fraud Charges Under 15 USC 78j and Rule 10b-5

Federal Securities Fraud Charges Under 15 USC 78j and Rule 10b-5

So your probably facing federal securities fraud or insider trading charges and your ABSOLUTELY CONFUSED because you thought trading stocks was legal. Maybe you bought shares based on information from work colleague. Maybe there’s allegations you made misleading statements to investors. Or maybe SEC and DOJ claim you traded on “material nonpublic information.” Look, we get it. Your COMPLETELY TERRIFIED about securities prosecution. And you should be! Because securities fraud under 15 USC 78j carries 20 YEARS in federal prison and $5 MILLION fine and prosecutors treat Wall Street crimes as priority cases that generate headlines!

What Is Federal Securities Fraud Under Section 10(b) and Rule 10b-5?

Let me explain the prosecutorial weapon targeting anyone in securities markets. Section 10(b) of Securities Exchange Act of 1934 prohibits fraud in connection with purchase or sale of securities – implemented through SEC Rule 10b-5 which has incredibly broad language!

Rule 10b-5 has THREE alternative violations prosecutors can charge! (a) using device or scheme to defraud, (b) making untrue material statement or omitting material fact, (c) engaging in practice that operates as fraud! Each carries same 20-year maximum!

Here’s what’s really scary – “in connection with purchase or sale of security” is interpreted INCREDIBLY broadly! Don’t need to personally buy or sell! Tipping someone who trades? That’s “in connection with”! Making statement that affects stock price? Connected! We’ve seen prosecutions for tangential market connections!

Two enforcement tracks exist – SEC civil enforcement AND DOJ criminal prosecution! SEC handles negligent violations with civil penalties! DOJ prosecutes willful violations criminally! But same conduct gets BOTH – face SEC lawsuit AND criminal charges simultaneously!

What Is Insider Trading?

Insider trading is most commonly prosecuted securities fraud!

Insider trading occurs when someone trades securities based on material nonpublic information in breach of fiduciary duty! Classic insider: corporate officer trades on confidential information about company! Temporary insider: lawyer or consultant trades on client information! Tippee: person receives tip from insider and trades!

The Dirks test governs insider trading prosecutions! Must prove: (1) breach of fiduciary duty to shareholders, (2) tipper received personal benefit, (3) tippee knew or should have known about breach! All three elements required!

“Personal benefit” was litigated for decades! Newman decision required pecuniary or valuable benefit! But Supreme Court in Salman v. United States (2016) REVERSED this! Gift of confidential information to family member or friend satisfies personal benefit! Don’t need cash payment or quid pro quo!

This EXPANDS insider trading prosecutions! Tell your brother about upcoming merger so he profits? That’s personal benefit through gift! Share information with college friend? Personal benefit! Prosecutors no longer need to prove financial kickback!

Recent cases show aggressive enforcement! 2025 case: defendant pleaded guilty to trading on nonpublic information about corporate acquisitions! Generated $216,965 profit but faces 20 years! SEC pursuing both civil penalties AND DOJ criminally prosecuting!

What Is “Materiality” in Securities Fraud?

Materiality is CRITICAL element but broadly interpreted!

Information is material if substantial likelihood reasonable investor would consider it important! Must significantly alter “total mix” of available information! Not just “nice to know” – must be decision-influencing!

Classic material information: merger announcements, earnings reports, FDA drug approvals, major contract awards, executive resignations! But also includes negative information – failed products, accounting fraud, regulatory violations!

Omissions can be material! Failing to disclose conflicts of interest, risks, related party transactions! Half-truths that mislead by omitting critical context are material misstatements!

Forward-looking statements create gray area! Projections, forecasts, opinions about future performance! Generally less likely to be material unless made without reasonable basis! Safe harbor provisions protect some forward-looking statements!

Prosecutors argue almost everything is material! Found emails mentioning upcoming product? Material! Overheard conversation about contract negotiations? Material! We challenge by showing information was speculative, already public, or wouldn’t affect reasonable investor!

What Is “Scienter” Requirement?

Scienter means intent to deceive – distinguishes criminal from civil violations!

Must prove defendant acted with intent to deceive, manipulate, or defraud! Negligence ISN’T enough for Rule 10b-5! Recklessness MAY suffice but must be extreme departure from reasonable conduct!

For criminal prosecution, must prove willfulness! Higher than civil standard! Willfulness means intentional violation of known legal duty! Mistake or negligence doesn’t support criminal conviction!

Circumstantial evidence proves scienter! Prosecutors show: pattern of trading before announcements, attempts to conceal trading through nominees, inconsistent explanations for trades, destruction of evidence! Jury infers intent from suspicious circumstances!

Good faith belief destroys scienter! If you genuinely believed information was public or immaterial, no intent to deceive! We prove clients consulted counsel, disclosed information appropriately, acted transparently!

Rule 10b5-1 trading plans provide defense! Pre-planned automatic trades established before receiving material information show lack of scienter! Can’t have intent to trade on inside information if trade was automatic!

What Are Penalties for Securities Fraud?

Penalties are CRUSHING with criminal and civil exposure!

Criminal penalties: 20 years maximum prison and $5 million fine for individuals ($25 million for corporations)! Each fraudulent transaction is separate count! Multiple stock trades? Multiple counts with cumulative 20-year maximums!

SEC civil penalties STACK on criminal penalties! Civil penalty up to three times profit gained or loss avoided! Made $100,000 from insider trade? Face $300,000 civil penalty PLUS criminal fine PLUS prison!

Disgorgement of profits is MANDATORY in civil cases! SEC requires return of all ill-gotten gains! Even if criminal case dismissed, SEC can still require disgorgement! We’ve seen defendants lose all trading profits plus penalties!

Industry bars destroy careers! SEC can ban from serving as officer/director of public company! Permanent prohibition from securities industry! Investment advisors lose licenses, brokers can’t work in finance!

Sentencing guidelines enhancements based on loss amount! Base offense level 6 but gain or loss adds levels exponentially! Insider trading generating $5 million gain? Guideline sentence of 6-8 years! More than 10 victims adds levels! Sophisticated means adds levels!

What Are Common Securities Fraud Scenarios?

Prosecutions cover wide range of conduct!

Corporate insider trading by executives! CEOs, CFOs, board members trading before earnings announcements, mergers, product launches! Each trade is separate count! Recent trend: prosecuting family members who received tips!

Investment advisor fraud! Ponzi schemes, churning accounts, undisclosed conflicts, false performance claims! Bernie Madoff-style frauds! Misappropriating client funds, self-dealing, secret kickbacks from recommended investments!

Tipping schemes! Sharing inside information with friends, family, or in exchange for payments! Salman case: brother tipped family members about upcoming mergers – all convicted! Tippers and tippees both liable!

Pump and dump schemes! Artificially inflating penny stock prices through false statements then selling at peak! Microcap fraud using spam emails, cold calls, internet promotions! Each false promotional statement is securities fraud count!

Accounting fraud by public companies! Misstating revenues, hiding liabilities, improper reserves! Executives certifying false financial statements under Sarbanes-Oxley! WorldCom, Enron-type frauds still prosecuted!

What Is Difference Between SEC Civil and DOJ Criminal Cases?

Two parallel enforcement tracks with DIFFERENT standards!

SEC brings civil enforcement for negligent violations – easier to prove! Preponderance of evidence standard! Can settle without admitting guilt! Penalties are fines, disgorgement, industry bars – no prison!

DOJ prosecutes criminal violations requiring willfulness! Beyond reasonable doubt standard! No settlement without plea – must admit guilt! Penalties include prison, criminal fines, restitution!

Same conduct gets BOTH! Trade on inside information? SEC files civil complaint seeking penalties AND DOJ files criminal indictment seeking prison! Can’t use Fifth Amendment in SEC case without consequences but must protect yourself in criminal case!

This creates TERRIBLE dilemma! Cooperate with SEC investigation? Statements used in criminal case! Assert Fifth Amendment? SEC draws adverse inferences in civil case! Need lawyer who handles both civil and criminal simultaneously!

Criminal case typically comes second! SEC investigates first, gathers evidence, takes testimony! Then refers to DOJ for prosecution! Anything you said to SEC? Becomes criminal prosecution evidence! Never cooperate with SEC without considering criminal exposure!

What Are Defenses to Securities Fraud?

Several defenses exist but require sophisticated securities litigation experience!

Lack of scienter is primary defense! If you didn’t know information was material or nonpublic, no intent to deceive! We prove clients believed information was public, consulted compliance, followed procedures!

Information was public! If allegedly “inside” information was actually available through public sources, not insider trading! Mosaic theory: gathering public information doesn’t become insider trading! We show information was in press releases, analyst reports, public filings!

Immateriality defense! If information wouldn’t affect reasonable investor’s decision, not material! Speculative information, minor details, publicly-known facts! Challenge government’s materiality proof!

No breach of duty! If you didn’t owe fiduciary duty to shareholders and weren’t tippee from someone who did, not insider trading! Outsiders who independently discover information through legitimate research can trade!

Advice of counsel defense! If securities lawyer advised trading was proper and you relied in good faith, negates willfulness! Must show full disclosure to counsel and reasonable reliance!

Statute of limitations! Generally 5 years for criminal securities fraud! Each trade restarts clock but must identify when violation occurred! We challenge stale charges!

Why Securities Fraud Defense Requires Specialized Wall Street Attorneys

Look, we’re not your typical lawyers who don’t understand securities markets and insider trading law. We’re former federal prosecutors who CHARGED securities fraud with SEC and DOJ and know EXACTLY what government must prove – especially scienter and materiality!

We understand how to navigate parallel SEC civil and criminal investigations! We know when information was public through legitimate research! We can establish Rule 10b5-1 trading plan defenses! Most importantly, we prevent legitimate trading from becoming federal prosecutions!

Other lawyers let clients cooperate with SEC without considering criminal exposure! They don’t understand Salman personal benefit test! Their ignorance leads to statements that become prosecution evidence!

Call us RIGHT NOW at 212-300-5196
SEC and DOJ coordinate investigations – need unified defense!
Former federal prosecutors – Securities fraud specialists – Available 24/7!

Don’t speak to SEC investigators without experienced securities counsel! SEC refers cases to DOJ for criminal prosecution! Every answer in SEC testimony becomes evidence! Assert your rights and call us IMMEDIATELY!

Remember – federal securities fraud isn’t just for Wall Street criminals, its for anyone who trades stocks with any information advantage. One trade before announcement, one tip to family member, one failure to disclose material fact can mean 20 years in federal prison plus millions in fines. You need someone who understands both complex securities law AND criminal defense. Call us NOW before trading becomes federal prosecution!