Federal Investment Fraud

Federal investment fraud is a serious crime, punishable by millions of dollars in fines and up to 25 years in prison. If you are the subject of an investigation or are currently facing charges, your most prudent move is to immediately contact a criminal attorney to help you formulate your strongest possible defense strategy.

Our criminal attorneys have years of experience defending financial professionals faced with federal investment fraud charges. Our boutique structure and grounding in white collar crime make us uniquely qualified to provide the zealous representation required to defend an investment fraud charge successfully.

While consulting with a criminal attorney is the only way to understand how the layers of legal nuance pertain to the details of your situation, this article should address your general questions with the level of comprehensive depth you need to accurately assess your current or prospective attorney’s competency and suitability to your circumstances.

What is Investment Fraud?

Investment fraud is a broad term covering a number of different specific crimes. Generally, it refers to the practice of inducing financial decisions from investors based on false information.

There are numerous types of investment fraud, with some of the most common types briefly described below:

Pyramid schemes promise investors large profits as commission for recruiting new investors.
Ponzi schemes fake large returns by drawing from a pool of small investments to pay obligations.
Pump-and-dump schemes spread false information about a stock to temporarily drum up prices the fraudster can cash out on, leaving investors with worthless shares.
Advance fee fraud collects a fee in exchange for a promise to purchase worthless stock at a high price, with no follow through on the promise.
Churning occurs where a broker with control of an investor’s account excessively buys and sells stock to generate commissions.
Insider trading involves trading a public company’s stocks or securities based on information not publicly available.
Outsider trading occurs when investors hack into a corporation’s databases to make investment decisions based on private information.
Offshore Scams can involve any of the above schemes but are easier to execute and harder to detect due to Regulation S., which exempts U.S. companies from registering with the SEC securities exclusively sold abroad.

Of course, anyone can commit investment fraud, but a 2017 report issued by the United States Sentencing Commission found that of the 230 securities and investment fraud offenses occurring that year, 92% were men, 80% were white, 92% were United States Citizens, and the majority had little to no criminal history. The average loss was roughly two million dollars.

Relevant Laws

The SEC is the government agency in charge of enforcing federal securities law. It was established under The Securities Exchange Act of 1934, which prohibits the following:

The attempt of actual defrauding of a person in connection with a commodity for future delivery.

Obtaining through means or false or fraudulent pretenses any sale or option on a commodity for future delivery.

The following acts may also come into play in an investment fraud case:

The Trust Indenture Act of 1939 requires that certain securities can only be sold to the public if there is a public agreement between the issuer of bonds and the bondholder.

The Investment Company Act of 1940 regulates conflicts of interests between trading companies whose business is in trading securities.

The Sarbanes-Oxley Act of 2002 created The Public Company Accounting Oversight Board, which encourages corporate responsibility.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 were enacted to enhance consumer protection, as well as increase corporate governance, disclosure, and transparency.

Jumpstart Our Business Startups Act of 2012 aims to help business raise funds in public capital markets by minimizing regulatory requirements.

How is Investment Fraud Detected?

There are numerous sources of investment fraud detection, including the following:

Federal Regulatory Agencies:

Because of the disclosure required of financial companies, the federal government can sometimes detect fraud directly.

For example, The Securities Exchange Act of 1933 requires companies to complete a registration process in order to legally sell securities in the U.S.. To comply, companies must provide descriptions of their properties, business, and the securities to be sold, as well as general information regarding company management and financial statements certified by independent accountants.

In addition, The Securities Exchange Act of 1934 gives the SEC broad authority to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and the nation’s securities self regulatory organizations. The act also empowers the SEC with the authority to periodically require companies with publicly traded securities to report information.

Further, when a company’s securities are held by more than 500 owners, and the company holds more than $10 million in assets, owners must publicly file annual reports. Disclosure of materials used to solicit shareholder votes must also be filed prior to solicitation in order to ensure all important factual considerations are disclosed.

Whistleblowers:

Sometimes fraud is detected from within an organization. The Sarbanes Oxley Act makes it easier for employees to come forward with accusations of corporate fraud by mitigating their fear of financial ruin.

The act not only prohibits companies from retaliating against employees who lawfully provide information to investigators or testify in enforcement proceedings, it creates a civil action allowing employees to sue employers for discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against them as a result of their contribution to the investigation.

This provision encourages employees with knowledge of corporate fraud to report it, because they know that if doing so costs them their job they will likely make back their lost earnings in the civil suit.

Investors:

Investors who have been financially injured by the collapse of a fraudulent scheme provide an obvious source of detection, as they tend to report their losses and seek retribution. But prospective investors can be a source of fraud detection as well.

The internet is full of articles broadcasting the tell-tale investment fraud signs, and prospective investors are liable to report potential violators to regulatory agencies.

Marketing materials can be a tip off, most classically where a firm promises to provide the impossible: risk free investments or guaranteed returns. Other red flags include opportunities to take advantage of a “once in a lifetime deal”, invitations to join “a select group of exclusive investors”, and conspiracy theories about the government employed to legitimize promised “secrets of the rich”.

Similarly, a negative experience with a salesperson can raise alarm bells. Whether investors are encouraged to invest all in a single account, discouraged from taking time or seeking a second opinion, plied with claims about “special connections”, overloaded with complicated financial terminology, or assured a high return in a low period of time, they may come away from the experience suspecting foul play.

Accordingly, be mindful of your advertising tactics and the sales strategies employed by the people you work with. Be honest about what you are able to provide and make sure everyone on your team is on the same page.

What Happens When Fraud is Detected?

Where the fraud detected has not yet occurred, or where it is ongoing, one of the government’s first concerns will be to protecting investors by immediately putting a stop to the scheme.

Accordingly, U.S. Code § 1345 provides that where a person is found to be either presently committing or about to commit investment fraud, the attorney general may file a civil action to immediately stop or prevent the fraudulent conduct. While the civil action would operate as a means of preventing the harm, a criminal indictment against the suspect may result.

Sentencing:

Criminally, investment fraud is prosecuted under U.S. Code § 1348, which reads:

“Whoever knowingly executes, or attempts to execute, a scheme or artifice—(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or 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 commodity for future delivery, or any option on a commodity for future delivery, or 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)); shall be fined under this title, or imprisoned not more than 25 years, or both.”

In short, the act provides that violations of the Securities Exchange Act of 1934 are punishable by fine and/or a maximum of 25 years in prison. The United States Sentencing Commission (USSC) reported that in 2017, over 90% of securities and investment fraud offenders were sentenced to imprisonment, and the average sentence was roughly four years.

There are a number of factors which affect the length of your sentence. Indeed, the 2017 USSC report showed that 76% of fraud offenders received increased sentences according to the number of victims and the extent of harm, and 36% were increased due to the sophisticated means used to execute or conceal the offense.

Sentences were also increased according to the status of the offender: 21% for officers or directors, 17% for a leadership or supervisory role in the offense, 15% for abusing a public position of trust or using a special skill, and 8% for obstructing or impeding the administration of justice.

On the other hand, sentences were decreased in just 6% of cases according to the offender’s minor or minimal participation in the offense.

Additional Charges:

Commonly related charges, such as obstruction of justice, can also greatly increase your penalties. For example, section 302 of the Sarbanes-Oxley Act imposes:

Up to twenty years in prison and/or fines as punishment for “altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation”.
Up to $1 million in fines and ten years imprisonment for knowingly certifying financial reports that fail to comply with the act’s reporting requirements.
Up to $5 million in fines and twenty years imprisonment for executives who willfully certify noncompliant financial reports.

Defenses:

An investment fraud conviction does not simply require proof that you engaged in fraudulent conduct. It requires proof that an investor reasonably relied on the fraudulent information you at least recklessly provided. It also requires that his resulting decision caused him financial injury.

In other words, to get a conviction, the prosecution must establish each of the following elements must be established beyond a reasonable doubt:

The accused recklessly or intentionally

Misinterpreted or omitted information

On which the investor reasonably relied in making his decision

And that decision caused the investor financial loss.

Because a guilty verdict cannot be reached if any of the elements are missing, the basic defense strategy in an investment fraud case involves arguing that the prosecution failed to establish one or more elements beyond a reasonable doubt.

For example, your criminal attorney may contest the investor’s allegation that he reasonably relied on the information you provided by introducing evidence that the investor had access to the information you either misrepresented or failed to supply.

Alternatively, your criminal lawyer might introduce reasonable doubt into the assertion that your misrepresentation of the facts was intentional or reckless, by challenging the sufficiency of the prosecution’s evidence or introducing conflicting evidence.

Finally, even if it can be proven that you intentionally presented false information, and that the investor reasonably relied on that information in deciding to invest, the case may collapse if there is an absence of financial injury, or if there is no causal relationship between the investor’s financial injury and your fraudulent conduct.

What to Do if You Have Been Charged:

If you are charged with investment fraud, the first thing you should do is invoke your right to counsel. This will halt law enforcement’s efforts to question you and provide you with time to contact a criminal attorney. It is crucial that you thoroughly understand your legal rights and obligations before submitting to questioning.

Whatever you do, do not lie to investigators. This irreparable decision can provide the basis for its own felony charge. In addition, it will cast irreversible doubts on your credibility that will severely limit your defense possibilities.

Selecting an Attorney:

In choosing counsel, your best option is to retain a criminal attorney with experience handling investment fraud cases.

Although you may be subjected to a civil lawsuit relative to your offenses, the most egregious consequences will flow from any criminal conviction you might face. That is why you need a lawyer whose expertise is primarily grounded in defending clients against criminal allegations.

While your criminal lawyer will surely discuss this with you, it’s critical to underscore the importance of avoiding any activity that could lead to additional charges for obstruction. Accordingly, make sure to immediately instruct your staff and business partners to preserve all documents.

What to Expect From A Criminal Investment Fraud Case

Because of the extent of his crime and the wealth of incriminating evidence, the best criminal lawyer on the planet could not have saved Bernie Madoff from prison. This example serves to demonstrate the degree to which the outcome of your case will depend on your specific circumstances.

Getting your Case Dismissed

With that said, an experienced criminal defense attorney will do everything possible to get your case dismissed well before the trial stage. This involves preparing your case as if it’s going to trial, which is a win-win due to the no-guarantee reality of case dismissals.

You can assist your attorney’s efforts to get your case dismissed by putting together a “life resume” of information and personal evidence that will serve to establish your good character and thus counteract the implications of your actions.

Deciding Whether to Accept a Plea Deal:

If your case does not get dismissed, you will eventually be forced to decide whether to accept a plea deal from the prosecution. This would involve pleading guilty to a lesser charge, with accordingly reduced penalties.

Know that should your case reach this point, your criminal attorney’s efforts to get your case dismissed will not have been in vain, because they will have provided the basis for the negotiation of a better plea deal than what you were offered initially.

However, depending on the terms of the plea deal, the surrounding circumstances, as well as personal and professional considerations, you may decide to plead not guilty. An experienced criminal attorney who has done the homework will be in the best position to advise you of your chances of success at trial, which will depend on the weight of the evidence among other factors.

Going to Trial:

Finally, should your case reach the trial stage, conviction or acquittal will depend on whether the prosecution succeeds in proving every element of the offense beyond a reasonable doubt.

Your criminal attorney may cross examine the prosecution’s witnesses in order to challenge their credibility, and call witnesses to testify on your behalf. He may attack the validity of tangible evidence introduced against you and present conflicting evidence. He may raise legal arguments suggesting that the prosecution’s evidence is insufficient. Most likely, your criminal attorney will use a combination of tactics.

Whether the jury finds you not guilty will depend on both the weight of the evidence and the persuasiveness of both sides in arguing for and against your guilt. However, even in the unfortunate event that you are found guilty at trial, the strategy and diligence your criminal lawyer exercised from day one will likely affect how your circumstances are interpreted when determining your sentence.

Investment Fraud in the News

Recent acquittals of investment fraud cases demonstrate the importance of good lawyering.

For example, in April of 2018, an Illinois judge ruled to dismiss all charges against financial advisor Robert Acri for lying to investors, after his criminal attorney argued that that the prosecution had failed to establish their case beyond a reasonable doubt.

While Acri used investors’ money to make loans to real estate developers, causing them to lose millions when the market crashed, Acri’s attorney successfully argued that these agreements were consensual.

Then in May of 2018, David Demos, a former trader with Cantor Fitzgerald, was found not guilty of investment fraud. While prosecutors claimed Demos lied to customers regarding the prices his firm could charge to buy or sell mortgage bonds,

Demos’ criminal attorney successfully argued that the lies were not significant enough to impact his clients’ investment decisions. Although one client claimed he would have gone with a different firm had Demos told the truth, this allegation collapsed under cross examination.

Neither of these cases involved defendants who had been wrongly accused. Rather, they involve defendants who committed the conduct they were prosecuted for, but whose criminal lawyers successfully argued that the conduct failed to rise to the level necessary to convict under the law.

Conclusion

Hopefully, this article has given you a more solid understanding of how the law regards investment fraud, and what to expect if you’re facing charges. Always remember that while you cannot undo the past, how you handle the present plays an enormous role in determining your future.

To get a more nuanced understanding of how the content discussed in this article pertains to your circumstances, contact us today for a consultation.