Wire Fraud vs. Securities Fraud.

Are there any similarities between wire fraud and securities fraud?

There are many ways in which federal law enforcement agencies can use a wire-fraud charge as a backup to securities fraud. When federal prosecutors pursue an individual for securities fraud, they will frequently also pursue charges for wire fraud. As a result, many federal indictments combine wire-fraud and securities-fraud counts, and federal prosecutors will often execute these charges with the intent to secure a conviction on both.

Are there any other ways that wire fraud is different from securities fraud?

Another important difference between wire fraud and securities fraud is that a wire-fraud charge under 18 U.S.C. §1343 does not require proof that the relevant asset legally qualifies as a security.

In addition, a wire-fraud charge under 18 U.S.C. §1343 does not require a connection to a purchase or sale of the asset involved.

While many wire-fraud charges arise as a result of an alleged securities-fraud scheme, they are not always connected to a specific purchase or sale. In many cases, however, the transmission of an email, telephone call, or electronic bank transfer in advancement of a proposed securities scheme will be enough to satisfy the elements of §1343.

Ultimately, while the DOJ may use securities-fraud charges when they have evidence of a specific purchase or sale (or a specific failed purchase or sale), prosecutors will rely on federal wire-fraud statutes more often. Wire-fraud charges are generally easier to bring, and they carry similar, or even tougher, penalties in many cases.

Both charges are equally serious, and both carry the risk of long prison sentences and substantial fines.

So, regardless of whether you are facing charges for wire fraud, securities fraud, or both, it will be important to build a strategic defense as soon as possible. If you have any questions or concerns about facing charges for wire fraud, you should speak with an experienced defense lawyer at Spodek Law Group immediately.

What Must Prosecutors Prove in Order to Prove Wire Fraud?

18 U.S.C. § 1343 is the federal wire-fraud statute. It encompasses both public-sector and private-sector frauds, and as such, for the Department of Justice (DOJ) to pursue wire-fraud charges, the Department must be able to prove the defendant committed a scheme designed to obtain either money or another asset that qualifies as property. This applies to money and property held in public institutions and private businesses alike.

To prove a violation of 18 U.S.C. § 1343, prosecutors must prove the following three elements:

1. A Scheme to Defraud Someone of Money or Property

To be prosecuted under federal wire-fraud laws, an individual must have designed or participated in a scheme intended to deceive someone for the purpose of fraudulently obtaining money, securities, or another asset that qualifies as “money or property,” including “tangible or intangible rights.” Here, too, the intent to “defraud” must be accompanied by a target asset that meets this definition.

2. Specific Intent to Deceive and Deprive

Another key element for prosecuting federal wire fraud is specific intent. The prosecution must be able to establish that a defendant, during the course of a scheme, made one or more misrepresentations with the intent to deceive in order to obtain money or another asset qualifying as “property.” If the misrepresentations were made inadvertently or were the result of a mistake, then federal prosecutors will lack a viable case under 18 U.S.C. § 1343.

3. A Qualifying Interstate or Foreign Wire Transmission

The final element that the government must prove is a qualifying interstate or foreign wire transmission that takes place “for the purpose of executing such scheme or artifice.” Without a qualifying wire transmission, the Department of Justice (DOJ) cannot prosecute a case under Section 1343.

As a result of 18 U.S.C. § 3237(a), federal prosecutors will seek to bring charges in any district where a qualifying transmission “begin, be continued, or be completed.” Thus, a defendant accused of using a wire transmission to perpetrate an alleged securities fraud scheme can be prosecuted in any district in which the transmission began, continued, or was completed.

The federal government can also seek to bring charges for wire fraud more than once. If a defendant is accused of multiple qualifying transmissions, then this can (and often does) lead to multiple counts of wire fraud being filed against the defendant. For example, if five qualifying transmissions are part of a single fraudulent investment scheme, then federal prosecutors will seek to secure a guilty verdict in five separate counts of wire fraud.

Which Securities Fraud Law Is the Government Using?

If you are facing charges under 18 U.S.C. § 1348, a federal prosecutor must prove you defrauded, or attempted to defraud, someone in connection with a covered security, commodity, or certain government-insured deposits. While federal prosecutors generally choose between criminal securities fraud charges under Rule 10b-5, Section 1348, the Securities Act, or the Exchange Act, each of these statutes applies in different scenarios and imposes different (and substantially different) burdens of proof.

How Does Section 1348 Compare to Rule 10b-5?

While both Rule 10b-5 and Section 1348 criminalize investor fraud, these laws are different in several key respects. Among these, the most significant is that, unlike under Rule 10b-5, federal prosecutors do not need to establish investor reliance or economic loss to secure a criminal conviction under Section 1348. In addition, Section 1348 covers fraud in connection with “commodities, any convertible security, or any government-insured deposits,” and its definition of a “covered security” is more restrictive than Rule 10b-5’s definition of a security.

What Is the Difference Between Rule 10b-5 and Section 1348(1)?

While Rule 10b-5 and Section 1348(1) both criminalize fraudulent acts in connection with securities transactions, they have two critical differences. First, as mentioned above, Section 1348(1) requires prosecutors to establish that the alleged fraud was “in connection with” a covered security. Rule 10b-5, on the other hand, only requires that the alleged fraud relate to the “purchase or sale of any security.”

Second, while Rule 10b-5 expressly requires a connection to a “purchase or sale,” Section 1348(1) also allows for criminal liability even if no purchase or sale took place.

What Is the Difference Between Section 1348(1) and Section 1348(2)?

Section 1348(1) is similar to Rule 10b-5 in that it criminalizes fraudulent acts “in connection with” a securities transaction, but, unlike Rule 10b-5, it does not require an actual purchase or sale. On the other hand, Section 1348(2) expressly requires that an alleged fraud be in connection with “purchasing or selling a covered security.”

What Is the Difference Between Rule 10b-5 and Section 17(a) of the Securities Act?

Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Rule 10b-5 are two of the most prominent federal laws against securities fraud. While both laws impose civil liability for fraud in connection with the offer or sale of securities, Rule 10b-5 is the primary source of criminal liability. Although Section 17(a) does impose criminal liability for certain violations, federal prosecutors primarily use Section 17(a) to seek civil damages.

What Is the Difference Between Rule 10b-5 and Criminal Violations of the Exchange Act?

Rule 10b-5 and other criminal provisions of the Exchange Act, 15 U.S.C. § 78a et seq., both impose criminal liability for fraudulent acts. However, criminal liability under the Exchange Act is subject to “willfulness” (15 U.S.C. § 78ff(a)), whereas criminal liability under Rule 10b-5 requires defendants’ alleged statements or omissions to be both “materially misleading” and presented “with scienter.” Scienter generally requires evidence of “willfulness” (i.e., the defendant’s intent to mislead), although “recklessness” (i.e., the defendant’s reckless disregard for the truth) can be sufficient.

Can prosecutors charge wire and securities fraud together?

Can the DOJ Prosecute Wire Fraud While the SEC Proceeds with a Civil Securities Enforcement Case?

Yes, it is possible for the DOJ to pursue federal criminal charges for wire fraud (and/or securities fraud) while the SEC proceeds with a civil securities enforcement action. These proceedings may operate concurrently, and, in some cases, an SEC-originated investigation can expose potential liability under various other criminal statutes (e.g., mail-fraud, tax fraud, and/or money-laundering statutes) as well.

Can Prosecutors Charge Wire Fraud and Securities Fraud Together?

Yes, and, in many cases, doing so is a viable prosecutorial strategy. Because each offense has a different theory of liability, that is, for a defendant to be convicted of wire fraud and securities fraud, the government will have to prove elements of both offenses, and because they often do not merge into one or the other, these charges are not generally considered the same. Thus, while the government may not be able to seek penalties under both statutes concurrently, prosecutors will typically execute both wire-fraud and securities-fraud charges with the intent to secure a guilty verdict in at least one.

Importantly, under the double-jeopardy doctrine, this is not considered an unconstitutional double prosecution. As a result of the U.S. Supreme Court’s decision in Blockburger v. United States, 284 U.S. 299 (1932), defendants will generally not be able to invoke a double-jeopardy defense unless they have already been charged and convicted of the exact same offense or “elements that are essentially the same.” But, because wire fraud and securities fraud each have distinct elements, specifically, wire fraud requires that the defendant used a wire transmission to advance his or her fraudulent scheme, whereas Section 1348 requires that the alleged fraud be “in connection with” a covered financial instrument, the two offense theories satisfy Blockburger.

What Is the Potential Maximum Federal Prison Sentence for Conviction on Federal Wire-Fraud and Securities-Fraud Charges?

Under the United States Sentencing Guidelines (USSG), all offenses (including convicted charges for both wire fraud and securities fraud) will be subject to the provisions of USSG § 2B1.1. For wire fraud and securities fraud (which both fall under the USSG’s “fraud and deceit” offense category), the statutory maximum is 20 years per wire-fraud count and 25 years per Section 1348 count. However, fraud counts governed by Section 2B1.1 will generally group under Section 3D1.2(d).

Todd Spodek is the managing partner of Spodek Law Group, a second generation criminal defense firm that has been practicing since 1976.

What Defenses Can Defeat Investment Fraud Charges?

While many defenses can be available in a securities fraud case, the defenses available for specific alleged violations will differ. Some examples include:

1. The Alleged Investment Does Not Legally Qualify as a “Security”

One of the primary defenses that can be available in securities fraud cases is the defense that the alleged investment in question does not qualify as a “security” within the meaning of relevant federal law. While this may seem like a minimal or negligible defense, especially given that broad phrases like “the investment contracts,” “securities,” and “financial instruments” are used in securities laws like the Securities Act and the Exchange Act, this is a threshold issue that can lead to the dismissal of the charges if the defense is successful.

While some securities offerings must go through SEC registration, registration violations do not, by themselves, provide evidence of criminal securities fraud (and vice versa). Additionally, several federal exemptions allow for certain securities offerings to be exempt from registration entirely, and an experienced securities fraud defense lawyer may be able to help protect you by arguing that you were exempt from registration.

2. The Defendant Did Not Possess or Use Material Nonpublic Information

Possessing material nonpublic information is one of the prerequisites for insider trading liability. However, mere possession of such information is insufficient to prove liability for insider trading. In addition, federal securities enforcement laws protect individuals from liability for insider trading in many cases, including cases in which the information was acquired through no fault of the defendant and the defendant has no obligation to keep the information confidential.

3. The Defendant Was Grossly Negligent, But Not Intentionally Deceptive

While securities fraud and other federal fraud cases allow for the possibility of imposing civil liability for “negligent misrepresentations,” they generally do not allow for the imposition of criminal liability for “negligent misrepresentations,” either. Mere oversight, whether it resulted from negligence or gross negligence, is generally insufficient to establish criminal fraud.

4. The Defendant’s Misstatements or Omissions Related to Investment Recommendations

A defendant may be subject to civil liability for certain misstatements or omissions related to investment recommendations, but it is still required that the allegations advance criminal fraud based on the defendant’s deceptive intent and his/her reckless disregard for the truth.

5. The Investment Transaction Does Not Satisfy the “Howey Test”

When a defendant has no contractual or fiduciary relationship with his or her investor, the investor’s investment may still qualify as a “security” if it satisfies the “Howey test.” The Howey test considers the following four factors in determining whether the subject matter of an alleged transaction represents an investment contract: (i) investment of money, (ii) common enterprise, (iii) reasonable expectation of profit, and (iv) profit from the efforts of others.

When applying the Howey test to crypto or NFT transactions, investigators and prosecutors will not simply rely on the label they have given to the asset. Instead, they will conduct a thorough analysis of the crypto or NFT transaction in question and the nature of the digital asset, including all representations and promises the defendant allegedly made.

What Are the Penalties and Deadlines That Apply to Each Type of Charge?

Potential Penalties for a Criminal Securities Fraud Conviction

While a criminal securities fraud conviction can carry a prison sentence of up to 25 years, with 20 years available for willful violations of the Exchange Act (15 U.S.C. § 78ff(a)), the potential for civil penalties is far greater. The monetary consequences of a civil or criminal securities fraud conviction can be substantial.

As noted above, fines imposed on individuals can range from $100,000 to $5 million, and fines imposed on publicly traded companies can range from $250,000 to $25 million. The financial penalties imposed in a criminal case can depend on the number of counts for which the defendant is found guilty, and the penalties imposed in a civil case can be tied to the profits the defendant is alleged to have generated through fraudulent investment schemes.

Potential Penalties for a Criminal Wire-Fraud Conviction

In most cases, a criminal wire-fraud conviction carries the risk of up to 20 years’ imprisonment. However, as mentioned above, if a defendant’s alleged fraudulent scheme was designed to affect a financial institution’s properties, deposits, assets, or accounts, the maximum potential term of imprisonment is 30 years.

Statutes of Limitations for Federal Securities and Wire Fraud

The federal limitations period that generally governs prosecutions for securities fraud is the six-year period set forth in 18 U.S.C. § 3301.

In most cases, the federal limitations period for a wire-fraud prosecution is five years. However, as mentioned above, an alleged wire-fraud scheme targeting a financial institution may be subject to a ten-year limitation period under 18 U.S.C. § 3293.

Which Charge Is More Serious?

As a result of the differences outlined above, one cannot definitively say which charge is more serious. While a criminal securities fraud conviction can carry more substantial penalties in some cases, a criminal wire-fraud conviction can carry more substantial penalties in others. Similarly, while the limitations period that generally governs securities fraud is longer, the limitations period for wire fraud is longer in certain cases.

Ultimately, the seriousness of a federal investigation or prosecution depends on the specific circumstances involved, and all individuals facing potential liability under the federal statutes discussed above should contact an experienced defense attorney promptly.

Can Victims Recover Money Through the Wire Fraud or Securities Fraud Statutes?

What Forms of Relief Are Available in Securities and Wire Fraud Cases?

Asset freezes, receiverships, and temporary restraining orders (TROs) are among the many relief options available in securities and wire fraud litigation. When pursuing civil action for damages or seeking other types of relief, plaintiffs can use all of these options regardless of whether they are seeking civil relief through the SEC or through private civil litigation.

Can Victims Sue Directly for Damages in Securities and Wire Fraud Cases?

Victims can sue directly for damages in civil securities fraud cases under Rule 10b-5. The criminal wire fraud and Section 1348 statutes create no private cause of action, so victims of those offenses must rely on criminal restitution or on separate civil claims.

What Are the Differences Between the Criminal Wire-Fraud Statute, Section 1348, and Rule 10b-5 with Respect to Private Civil Causes of Action?

1. Criminal Wire-Fraud Statute

The criminal wire-fraud statute does not create a private civil cause of action. While it imposes potential criminal liability for individuals and entities suspected of wire fraud, this statute generally does not support private lawsuits for implied damages.

2. Section 1348

Similarly, Section 1348 does not create a private civil cause of action. As a result, a victim of securities fraud under Section 1348 will generally not be able to pursue a private civil cause of action, and the victims will need to recover any financial losses through civil law.

3. Rule 10b-5

By contrast, Rule 10b-5 supports a private cause of action for implied damages for qualifying buyers and sellers in securities transactions. As a result, while a victim of a criminal securities fraud investigation will generally not be able to seek damages under Rule 10b-5, the rule does support private civil lawsuits for implied damages, though plaintiffs must satisfy three specific elements to secure a judgment.

What Must Plaintiffs Establish to Secure Damages in a Private Civil Suit Under Rule 10b-5?

To establish a claim for damages in a private civil suit under Rule 10b-5, a plaintiff must be able to establish that:

• The defendant’s statement was materially misleading
• The plaintiff relied on a materially misleading representation (i.e., the plaintiff acted in reliance on the misleading statement/omission)
• The plaintiff suffered a demonstrable economic loss resulting from the fraudulent purchase or sale of a security
• The loss resulted from the defendant’s fraud (i.e., loss causation)
• The defendant’s representation (or omission) was made with scienter, meaning it was made with the knowledge that it was misleading or with reckless disregard for the truth.

Can the SEC Bring a Civil Enforcement Action Under the Criminal Wire-Fraud Statute?

No. Unlike federal securities laws and other federal statutes (e.g., the RICO Act), the criminal wire-fraud statute does not allow for civil enforcement actions. While a federal prosecutor can pursue criminal charges for alleged fraud under the criminal wire-fraud statute, the SEC cannot bring a civil enforcement action under the statute.

What Are the Restitution and Asset Forfeiture Provisions Under the Criminal Wire-Fraud Statute?

The criminal wire-fraud statute does not provide a private civil cause of action, but it does provide for restitution and asset forfeiture. As a result, if a defendant is found guilty of wire fraud (or other qualifying offenses), the following provisions apply:

• Mandatory restitution: Under Section 3663A, the federal judiciary will mandate restitution if a defendant’s fraudulent scheme caused “identifiable pecuniary loss” to a victim of “qualifying fraud” (which includes wire fraud).
• Asset forfeiture: Under Section 981(a)(1)(C), federal prosecutors can seek the forfeiture of “any property, real or personal, including currency and securities, which is traceable to” the proceeds of a crime committed under the criminal wire-fraud statute.

Are Similar Restitution and Forfeiture Provisions Available in Criminal Securities Fraud Cases?

Yes. While not explicitly enumerated, criminal securities fraud convictions can also trigger mandatory restitution under Section 3663A and asset forfeiture under Section 981(a)(1)(C).

Can the SEC or the DOJ Freeze Assets or Impose Other Similar Forms of Relief?

Yes. In addition to seeking restitution or asset forfeiture in criminal cases, prosecutors

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.