Although highly-publicized securities fraud cases have waned in recent years, identifying and putting a stop to fraudulent practices by company executives, hedge fund managers, stock brokers, and other professionals remains a top federal law enforcement priority. With the adoption of 18 U.S.C. 1348 as part of the Sarbanes-Oxley Act in 2002, federal prosecutors gained access to a new tool for targeting individuals suspected of engaging in fraudulent practices affecting the U.S. securities market. Over the past decade, this statute has become a critical factor in large-scale securities fraud investigations.
Securities Fraud Under 18 U.S.C. 1348
Under 18 U.S.C. 1348, individuals can face substantial fines and up to 25 years of federal imprisonment for engaging in fraudulent securities transactions or using fraudulent practices to profit from others’ purchase or sale of securities. Specifically, 18 U.S.C. 1348 makes it a federal offense:
“(1) to defraud any person in connection with . . . any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or
(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of . . . any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) . . . .”
Unlike pre-existing securities fraud laws that were subject to well-recognized principles established over the course of decades of precedential court decisions, 18 U.S.C. 1348 effectively provided federal prosecutors with a blank slate or at least that is what they argued. Eschewing traditional principles of securities fraud, federal prosecutors have treated 18 U.S.C. 1348 much more akin to the mail and wire fraud statutes after it was modeled: as a broad prohibitory statute that does not target any specifically-defined “fraudulent” practices. This led the New York Times to call the statute, “a new way to charge insider trading,” and to ask the question, “Is this the government’s own attempt to ‘rewrite’ the requirements for proving a recipient engaged in insider trading?”
However, as its broad language permits, 18 U.S.C. 1348 has become a preferred tool for targeting all types of securities fraud, not just insider trading. Fraudulent practices that can be (and have been) prosecuted under 18 U.S.C. 1348 include:
- Account churning, making unsuitable investment recommendations, and other fraudulent broker practices
- Breach of fiduciary duty
- Front running
- Running Ponzi schemes
- Sales practice violations
- Selling securities without a license
- Selling unregistered securities
- Withholding or misrepresenting material information
Targeting Individuals Who Have Not Committed Securities Fraud: Conspiracy under 18 U.S.C. 371
While facing charges under 18 U.S.C. 1348 is obviously an extremely serious situation, there is actually another crime that should be of even greater concern to most company executives and investment professionals. This is conspiracy to commit securities fraud, a crime that exists pursuant to 18 U.S.C. 371.
Under 18 U.S.C. 371, targets of federal securities fraud investigations can be sentenced to fines and up to five years of imprisonment for conspiring “to commit any offense against the United States . . . or any agency thereof in any manner and for any purpose.” Offenses that fall within the scope of 18 U.S.C. 371 include securities fraud under 18 U.S.C. 1348. As a result, company executives and investment professionals can face federal imprisonment for conspiracy to commit securities fraud not only if no fraud is actually committed, but, as we discuss below, even if they do not play an active role in advancing the “conspiracy.”
The Low Threshold for Guilt for Conspiracy to Commit Securities Fraud
There are three basic elements of a conspiracy under 18 U.S.C. 371: (i) an illegal agreement, (ii) criminal intent, and (iii) proof of an overt act. While an individual must be part of an agreement and demonstrate the requisite criminal intent in order to be guilty of conspiracy to commit securities fraud, that individual does not have to be the one to commit the “overt act.” If any member of the conspiracy commits an overt act in furtherance of the conspiracy, this is sufficient to trigger liability for each and every other co-conspirator.
Critically, the overt act does not itself have to be criminal in nature. As a result, it is theoretically possible for multiple individuals to be prosecuted for conspiracy to commit securities fraud as a result of one person’s actions such as:
- Contacting investment clients
- Developing a plan to execute a churning scheme or Ponzi scheme
- Purchasing a domain name for a website or email address
- Setting up a bank or brokerage account
- Taking other actions in anticipation of an attempted fraudulent practice or transaction
However, it is important to emphasize that an overt act, standing alone, does not amount to a federal conspiracy, and it will not trigger liability for individuals who lacked criminal intent or who took no part in an explicit or implicit agreement. Frequently, federal prosecutors will look for “hallmarks” of securities fraud in determining when to launch an investigation. And when they target one person, they will often target other individuals who appear to potentially have a relationship with that person that could manifest a conspiracy.
Mounting a Strategic Defense against Allegations of Conspiracy to Commit Securities Fraud
While 18 U.S.C. 371 and 18 U.S.C. 1348 are dangerous statutes for individuals involved in the securities market and who potentially have access to inside information, their scope is not unlimited. Individuals targeted in securities fraud investigations will often have multiple defenses available, and avoiding unjust prosecution is often a matter of setting the record straight before prosecutors file unsubstantiated charges.
If you are being targeted for conspiracy to commit securities fraud, it is important that you speak with a federal law defense attorney as soon as possible. To schedule a free and confidential consultation, call us at (888) 452-2503 or contact us online today.
Brian Kuester offers his extensive experience to counsel companies and individuals under civil or criminal government investigation. When resolution requires litigation, clients choose Mr. Kuester’s proven court and litigation experience.