Mutual Fund Fraud Defense

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Brian Kuester
Attorney Brian Kuester
Mutual Fund Fraud Defense Team Lead
Former US Attorney
Former District Attorney
Ellen Comley
Attorney Ellen Comley
Mutual Fund Fraud Defense Team Lead
Senior Counsel
Roger Bach
Roger Bach
Mutual Fund Fraud Defense Team Consultant
Former Special Agent (OIG)

There are numerous ways to commit securities fraud. One of them is through mutual funds. No matter how securities fraud is committed or the types of securities that are used to defraud investors, the penalties of a conviction can be severe. Regulated securities professionals will also lose the certifications that they need to perform their job and will likely be permanently banned from the industry if they are convicted for mutual fund fraud.

Getting the best white collar defense attorneys on your side is the best way to protect your rights and interests if you get charged or are under investigation for mutual fund fraud.

The Criminal Defense Firm has extensive experience in this area and touts a roster full of senior-level lawyers who will handle all of the aspects of your case.

How Mutual Funds Work

Mutual funds are collective pools of money from a diverse group of investors. That collective pools of assets – the mutual fund – is then invested in securities for the benefit of the fund’s stakeholders. The fund is managed by an individual or brokerage firm that makes the investment decisions. Generally, the securities purchased by the manager are a wide portfolio of stocks, bonds, and other types of securities that aim meet the targeted return of the mutual fund while also minimizing risk to the fund’s assets.

There are several types of mutual funds. They are classified based on:

  • The returns sought by the fund
  • The types of securities that the mutual fund holds

A few examples of the types of mutual funds out there are:

  • Income funds, which provide a small but steady revenue
  • Fixed-income funds, which produce a fixed rate of return on the investment
  • Money market funds, which are risk-free and short-term investments
  • Bond funds, which hold debt securities
  • Equity funds, which hold stocks
  • Hybrid funds, which hold both stocks and bonds
  • International funds, which invest in assets abroad

Given the complexity of these financial structures, the amount of money in them, and the frequently opaque nature of how they are managed, mutual fund fraud is not uncommon.

Examples of Mutual Fund Fraud

There are a variety of ways to engage in fraudulent or deceptive conduct when using mutual funds. Just a few examples are:

  • Front running fraud – The broker has inside information about upcoming, large scale trades in a particular security and purchases or sells their own shares in that security before the large transaction goes through in order to profit off the resulting rise or fall in price from the bulk move
  • Late trading fraud – Shares in a mutual fund are purchased or sold after-hours but recorded prior to the fund’s calculation of its daily net asset value, allowing the broker to illegally use post-trading news to better their positions
  • Breakpoint fraud – The broker does not inform his or her client of any volume discounts that are available for purchasing mutual fund assets above the breakpoint, increasing the broker’s fees
  • Prospectus fraud – Material information is misrepresented or omitted in the mutual fund’s prospectus
  • Churning – The broker makes extraneous transactions that increase the broker’s transaction fees without furthering the financial goals of the client or the mutual fund

In each of these cases, investors stand to lose money because the broker or the mutual fund’s manager is using his or her position in order to siphon funds off to their own personal accounts.

Both State and Federal Laws Regulate Mutual Fund Fraud

As a type of financial security, mutual funds are regulated by several major federal securities laws. The most prominent of these are the:

  • Securities Act of 1933
  • Securities Exchange Act of 1934
  • Investment Act of 1940
  • Investment Company Act of 1940

Note that all of these laws are nearly a century old. While they occasionally get amended by Congress, much of the necessary updates to their provisions come from the U.S. Securities and Exchange Commission (SEC), which promulgates regulations to better enforce the laws that it is tasked with enforcing.

Additionally, mutual funds can also be regulated by the Financial Industry Regulatory Authority (FINRA) and the Commodity Futures Trading Commission (CFTC).

Finally, each state has its own set of securities laws that cover intrastate commerce. State law enforcement personnel are also often the ones to investigate and prosecute relatively low-level securities fraud cases.

How Mutual Fund Fraud Investigations Frequently Work

Mutual fund fraud investigations often get triggered by investigators at the SEC or another law enforcement agency noticing signs or patterns of fraudulent trading, or by whistleblowers bringing evidence of mutual fund fraud to authorities. An investigation will look into the information and try to find more incriminating evidence. If the investigation uncovers more signs of fraud, a complaint may be issued against the mutual fund manager or company or the broker who is allegedly using the mutual fund to defraud his or her clients.

This complaint can escalate still further if the ongoing investigation uncovers enough incriminating evidence that it creates a probable cause to believe that a crime has occurred. At that point the investigators, often at the SEC, will hand their case off to the U.S. Department of Justice (DOJ) or to state prosecutors to present to a grand jury, secure an indictment and an arrest warrant, and file criminal charges for securities fraud.

Frequently Asked Questions About Mutual Fund Fraud and The Criminal Defense Firm

What are the Penalties for a Conviction of Mutual Fund Fraud?

It depends on the specific facts of your case, including how much money was allegedly defrauded and how it was taken. For example, if the scheme used a telecommunications device such as a phone or the internet – as many of them do – your mutual fund fraud case will likely also include a count for wire fraud. This count alone carries up to 20 years in prison.

Your criminal background will also matter. If you have been convicted for serious offenses before, particularly if those convictions are similar in nature to mutual fund fraud, the penalties will increase.

It is not just prison that is on the table, though. A criminal conviction will also carry steep criminal fines, restitution payments, disgorgement, relinquishment of your professional certifications, and probation. There will also be other collateral consequences of having a criminal conviction on your background, like difficulties in finding a job after serving your prison sentence and social stigmatization.

What if I Did Not Intend to Commit Mutual Fund Fraud?

Like other types of securities fraud, the crime of mutual fund fraud requires a specific intent to defraud someone else through your conduct. If you did not have that intent, you cannot be liable for the offense.

However, also like other types of securities fraud, mutual fund fraud can be pursued criminally or civilly. Just because there was no intent does not mean that you cannot face repercussions for your negligent or unknowing actions. Investors may have still lost a lot of money. Civil actions for mutual fund fraud can lead to judgments that force you to disgorge the profits of the fraud and pay victim restitution – monetary penalties that can still be quite substantial.

While prison time is no longer a possibility in a civil case, that does not mean that it is a trivial one.

Why Should I Hire The Criminal Defense Firm?

The Criminal Defense Firm is unlike most other law firms in your area in that the only people that can legally represent you in your case are senior attorneys. Unlike other firms, we are not a hierarchy of a few experienced attorneys with legions of junior associates and paralegals beneath them who do most of the actual work on your case. At The Criminal Defense Firm, we only have senior lawyers. All of our work product is a result of their efforts. This way, you can count on their experience throughout our legal representation.

At other firms, clients are often frustrated when they see that the lawyer with the experience and background that drew them to the firm is not actually the one handling their case. Instead, it is an attorney who just passed the bar exam, with only occasional oversight from the more experienced attorney.

That does not happen at The Criminal Defense Firm.

Why Don't Your Call Yourselves the Best Mutual Fund Defense Attorneys?

When our prior clients leave us such good testimonials, we do not think that we have to say those sorts of things about ourselves.

How to Hire The Criminal Defense Firm to Defend Against Allegations of Mutual Fund Fraud

If you have been charged with mutual fund fraud or think that you are under investigation for the offense, you need legal representation. Criminal convictions for these offenses carry huge fines and lengthy prison sentences. Even civil cases for mutual fund fraud can lead to massive monetary penalties that can cripple even the most solvent brokerage firms.

The white collar defense lawyers at The Criminal Defense Firm have a long history of protecting suspects and defendants against intrusive investigations and criminal charges, including when those allegations revolve around a mutual fund.

Call our attorneys at (866) 603-4540 or contact us online to get started on your case. The Criminal Defense Firm is a national law office with extensive experience in federal court. No matter where you are and how much is at stake, our attorneys are ready to protect your rights, interests, and professional future.

Dallas 214-817-2053
Houston 713-454-7814
Detroit 313-634-0925
Baton Rouge 225-269-8749
New York 332-239-7345
Winter Park 407-890-0460
Miami 786-751-3247
Portland 207-222-7742
Nationwide 866-603-4540