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Securities Fraud Criminal Prosecutions

Securities fraud is a broad term that applies to numerous federal and state civil and criminal statutes. Federal litigation resulting from securities fraud includes civil cases brought by the SEC, criminal cases brought by the Department of Justice, and private civil cases brought by victims of securities fraud. The Law Offices of Horwitz & Citro, P.A. represents individuals and companies who are the subject of SEC investigations and DOJ criminal investigations and prosecutions growing out of the myriad of federal securities statutes.

Prominent federal statutes in this area include the Securities Act and the Securities Exchange Act which prohibit willful violations of laws pertaining to securities. In addition, the Sarbanes-Oxley Act of 2002 can also result in criminal prosecutions. The SEC has a large staff that investigates allegations of securities fraud and has the authority to bring civil lawsuits, seeking injunctions and monetary damages, against those whom it considers having acted in violation of the securities statutes and regulations. It is common for the SEC to conduct an investigation and bring a civil lawsuit in relation to fraudulent security activity while the Department of Justice also conducts a criminal investigation that results in a criminal prosecution.

The Department of Justice brings criminal charges based upon the specific securities laws noted above, as well as general criminal statutes including mail fraud, wire fraud, Foreign Corrupt Practices Act, RICO and obstruction of justice. The penalties for violating securities laws are quite harsh with sentences of up to 20 years in prison for each count resulting in conviction. The criminal statutes have wide applications to any conduct involving securities. The laws apply to conduct deemed to be a scheme to defraud, in relation to the issuance or sale of securities and commodities.

For example, the Securities Act criminalizes any action in relation to the offer and sale of securities if a person employs a device, scheme or artifice, to defraud or obtain money or property, by means of any untrue statement of a material fact or any omission to state a material fact, which is necessary in light of the circumstances to make the statements true.

The Department of Justice brings criminal charges based not only on false statements, but also on the failure to state material facts. Given the complexities of securities laws, it is understandable that a prosecution may be brought against a person who did not intend to violate the law, but simply made a mistake.

In order to convict a person of securities fraud, the government must prove that the defendant acted willfully. In defending those under investigation and charged with securities violations, we have found that the government often reaches the wrong conclusion concerning the criminal intent of our clients.

It is without doubt that securities laws are complex and subject to different interpretations. An example of the government's overreaching can be seen in a securities fraud case which we defended. The government’s theory of prosecution was that press releases touting securities were false because of omissions of facts rather than false statements. In spite of our best efforts, we could not dissuade the prosecutors from moving forward with the criminal charges.

Prior to trial, the government proposed that our client plead guilty in return for the government recommending a sentence of 7 years in federal prison. Based upon our advice, our client declined to plead guilty. At trial, we put on a vigorous defense through cross-examination of the government's witnesses and through defense witnesses. Our contention was that the public statements were true, and that the defendant did not omit any facts because of an intent to defraud.

One of the important parts of the trial was the defense cross-examination of the government's expert (a law school professor specializing in securities laws). This cross-examination involved confronting the government's expert with material which the professor required his students to use in his course on securities law. Through use of the professor's own course materials, the defense was able to compel the government's expert to admit that reasonable minds, including judges, differed as to the nature and extent of disclosures that were omitted. This evidence elicited during cross-examination was crucial in overcoming the government's contention that the defendant acted willfully to hide material disclosures. The government expert admitted that often, even judges cannot agree as to what omitted facts made statements false in similar cases. The government was not able to obtain a conviction at the conclusion of the trial because the jury could not reach a unanimous verdict of guilty.

Shortly before retrial was scheduled to begin, the government made our client an offer to drop the felony securities fraud charge if our client plead guilty to a petty offense. The statute in question provided that if the violation of the securities laws and regulations was willful, it was a felony punishable by several years in prison. If, however, the violation was due to a mistake rather than willful conduct, the crime was a petty offense which did not provide for even one day in jail. The case resulted in our client never being convicted of a felony, or even a misdemeanor, and paying a small fine.

This is but one example of how the complexities of securities laws can result in the government incorrectly bringing serious felony charges. In our client’s case, the lead prosecutor for the government was an SEC senior trial counsel who had investigated the matter for the SEC and was sworn in as a Special Assistant United States Attorney to prosecute the criminal case.

As a result of the close coordination between the SEC and the Department of Justice, it is imperative that anyone under investigation by the SEC or DOJ contact our firm as soon as possible. By retaining our services at the early stages of the government investigation, we are able to conduct a thorough defense investigation, attempt to dissuade the government from bringing charges, be ready to put forth a vigorous defense and prevent conduct by our client which may be deemed by the government to constitute obstruction of justice. If the government believes that obstruction of justice occurred, the end result will be an indictment not only for the underlying securities fraud investigation but also separate charges for obstruction of justice.