10 Questions with Securities Fraud Defense Lawyer Nick Oberheiden

1. What Is Securities Fraud?

A “security” is a financial asset that can be bought and sold. Securities can take the form of any financial investment, such as stocks, bonds, and mutual funds. The most well-known form of securities trading is when publicly traded companies issue securities (often in the form of stocks) and investors purchase them. When an individual purchases a security, he or she owns a share in that publicly traded company. Individuals buy securities with the hope that the company becomes more profitable, thus increasing the value of their investment. Investors can make money off the sale of their securities, assuming the sale price is higher than the original purchase price. 

Violations of securities laws and regulations in the United States can have serious consequences—both civil and criminal. Under the Securities Act of 1933 and the Securities Exchange Act of 1934, securities fraud is defined as willfully engaging in deceptive practices intended to manipulate financial markets or induce investors to make financial investment decisions based on deceptive or false information. If an individual or entity knowingly provides false information about any form of security, they risk a potential investigation for securities fraud. The extent of punishment for securities fraud is based on the amount of money manipulated in the alleged scheme. 

Examples of securities fraud include: 

  • Insider trading
  • Manipulation of stock prices 
  • False promises on investment returns 
  • Submitting fraudulent filings to the SEC
  • Ponzi schemes
  • Pump and dump schemes 


2. Are Securities Fraud Investigations Civil or Criminal?

Securities fraud investigations can be both civil and criminal. Federal securities laws give the Securities and Exchange Commission (SEC) the right to bring civil actions for securities violations and the Department of Justice (DOJ) the right to bring criminal actions. Whether instances of securities fraud will be prosecuted civilly or criminally depends on individual circumstances. 

Civil investigations of securities fraud are generally conducted by the SEC and U.S. Attorney’s Office (civil section); investigations can also involve private lawsuits brought by plaintiff’s attorneys. The SEC has a regional foothold around the country, with offices in New York, Los Angeles, Chicago, Philadelphia, Atlanta, Denver, Miami, Salt Lake City, Fort Worth, Boston, and San Francisco. Criminal investigations are generally brought by the Department of Justice in conjunction with the U.S. Attorney’s Office. Civil penalties for securities fraud involve fines and license forfeiture, and criminal penalties can involve prison time, fines, and restitution.

3. What Happens in an SEC Whistleblower Case?

Whistleblower cases involve individuals with knowledge of securities violations informing the SEC of these alleged wrongdoings. If an individual knows that another individual or company is committing securities laws violations, that individual can tell the SEC without fear of potential civil or criminal repercussions. Usually, an individual will hire a plaintiff’s attorney to file a lawsuit alleging securities fraud against an individual or entity. At this stage, the SEC or DOJ can choose to intervene in the lawsuit and take over the investigation. The SEC or DOJ will intervene if it believes the allegations of fraud are credible and substantial. If the SEC or DOJ successfully prosecute the wrongdoer, the original plaintiff—the whistleblower—is entitled to a share in the recovered financial damages. 

4. How Can I Protect Myself Against the SEC Whistleblower Program?

The best way to protect yourself from getting into trouble with the SEC for securities violations is to ensure you are compliant with all federal laws involving securities. Federal securities laws can be complex, so it is good practice to have someone, whether an attorney experienced in securities laws or another knowledgeable individual, act as an overseer to your operations. This individual can properly advise you on legal compliance and draft compliance policies for your company. If you are facing a threat of an investigation based on alleged fraud, immediately contact an experienced attorney. Your actions at the onset of an investigation can greatly impact the outcome. 

If you think you are under investigation for securities fraud, do not speak with anyone (except your lawyer) about the allegations—especially law enforcement. Speaking dishonestly to someone from the SEC or DOJ can result in additional criminal charges under 18 U.S.C. 1001, which allows for criminal prosecution of an individual who lies to a federal agent. 


5. Can I Be Liable for My Employer’s Securities Fraud?

Under certain circumstances, yes. You can be held liable for your employer’s securities fraud, both civilly and criminally, under the concept of “conspiracy.” The conspiracy laws in the United States state that, if you act in concert with your employer to perpetrate the fraud, you can be held liable as well. For example, if your company suffered financial losses and your employer directs you to not disclose these losses on the company’s yearly SEC filings, you have acted in concert with your employer to commit fraud even though you did not cause the financial loss. 


6. When Are Brokers Liable for Securities Fraud?

Often, individuals use brokers to help them with the buying and selling of securities. A loss in value of an individual’s financial portfolio does not give rise to liability for the broker as brokers do not control the stock market. However, if brokers engage in an act of securities fraud, they too can be criminally and civilly prosecuted. If a broker does not disclose accurate financial information about the investments he or she is selling you, this is fraud. If a broker initiates stock trades without your consent or initiates trades just to earn a commission fee, this is fraud. 

In a criminal investigation against a broker, like in all other criminal investigations, the government will have to prove that the broker committed the alleged securities fraud beyond a reasonable doubt. Proving civil liability against a broker for securities fraud is a little easier as the government will just have to show the allegations were fraudulent by a preponderance of the evidence. This means it is more likely than not that the broker’s actions were fraudulent. 

7. What Are the Penalties for Securities Fraud?

Penalties for securities fraud violations depend on whether the investigation is civil or criminal. If you are convicted criminally of securities fraud, you can face prison time and substantial fines. Under the federal securities laws in the United States, the maximum punishment for criminal securities violations is 20 years in prison and a $5 million fine. Civil penalties for securities fraud can involve substantial fines as well, along with loss of licensure and temporary or permanent exclusion from engaging in securities trading. Often, civil investigations into securities fraud settle out of court. 


8. What Are Defenses to Securities Fraud?

The best defense is avoiding an investigation altogether. Engaging in preventative measures, such as working with an attorney to be properly advised on all legal obligations and to develop an effective compliance program are generally the best things a company or individual can do to prevent future civil and criminal liability. If you are already under an investigation for alleged security fraud, sometimes you can avoid prosecution if you agree to help the government. In exchange for your non-prosecution, you give the government information on other individuals and entities who are engaging in fraudulent activity. Negotiating for a non-prosecution agreement is difficult and requires the expertise of an experienced securities fraud defense attorney.

An individual can also avoid prosecution for securities fraud if that individual held a good faith belief that what they were doing was legal. To successfully assert this defense, the individual must have honestly believed that representations or statements he or she made were true, even if they turned out to be fraudulent. 

An individual can also assert what’s called a “no knowledge” defense to securities fraud. Section 32(a) of the Securities Exchange Act of 1934 provides that “no person shall be subject to imprisonment for the violation of any securities rule or regulation if the person proves to have no knowledge of such securities rule or regulation.” An individual can only assert this defense post-conviction, meaning the individual will have to concede that conduct he or she engaged in was fraudulent. An individual has to show by a preponderance of the evidence that he or she had no knowledge that the securities laws violated even existed. If successfully asserted, a court can only sentence an individual to probation for securities fraud. 

Finally, an individual accused of securities fraud—whether civil or criminal—can take his or her case to trial and try to convince a jury of his or her innocence. If acquitted by a jury, the individual will face no criminal or civil liability. 


9. How Do I Know If I Am Under Investigation for SEC Fraud?

Generally, you will be aware that you are under investigation for securities fraud. You may receive a request from a government agency to produce documents, or government agents may try to contact you or people you work with. The most common ways to know that you are under investigation are: 

  • Threats: Someone has made verbal or written threats to you that they are going to disclose your alleged illegal conduct to the SEC or DOJ. 
  • Rumors: You have heard people talking about a potential government investigation. 
  • Served a civil complaint: You are served with a lawsuit from a private party alleging you have engaged in securities fraud.
  • CID: You received a Civil Investigative Demand from the government requiring you to produce documents and answer certain written questions. 
  • Grand jury subpoena: You received a grand jury subpoena from the DOJ requiring you to produce documents.
  • Subpoena from the SEC or FBI: You received a subpoena from a government agency, such as the FBI or SEC, requiring you to produce documents. 
  • Agents trying to interview you or people around you: Anytime a government agent is trying to contact you, there is likely an active investigation. 
  • Search warrant: You receive a search warrant allowing government agents to search your office or other property, meaning there is an active investigation into alleged illegal behavior.
  • Arrest: If you are arrested, you have been charged with a crime. 

10. What Should I Do When I Am Under Investigation or Made a Mistake?

Don’t panic. If you are under investigation for alleged securities fraud or you think an investigation is forthcoming, contact an experienced securities defense attorney immediately. The sooner you involve an attorney, the better your chances are for resolving the pending allegations against you. 




Written by:
Spencer Calvert

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