What was once a statute with the focus of prosecuting crime families and criminal organizations, shortly after RICO was passed in 1970, the statute branched out to a broader application.
At that time, prosecutors interpreted the statute to allow them to prosecute white collar crimes, specifically securities fraud.
While securities fraud has a place in both the criminal law and civil law worlds, this article focuses on the criminal aspect. Even though securities fraud can be made of many different acts, it is easiest to think of it as investment fraud.
Examples of Securities Fraud
Examples of securities fraud include:
- A broker explaining to an investor that there was a high-yield investment, explaining that the rates on the return would be high and that regardless of this benefit there is practically none or no risk.
- Ponzi/ pyramid schemes and recruitment into Ponzi/ pyramid schemes.
What Is “RICO?”
RICO is actually short for Racketeer Influenced and Corrupt Organizations Act. It is a statute that was created to combat individuals and groups of people who act as an enterprise to engage in a pattern of racketeering activity, or are in the practice of collecting unlawful debts. Basically, the purpose included the ability to seek prosecution of both the person who is in management and a person who may be a lower level employee/worker.
What Is “Racketeering?”
Racketeering activity itself has its own meaning. The statute that defines it is very dense because racketeering activity can include acts from different statutes. Essentially racketeering activity is one of two things: 1) a threat relating to certain violent offenses or drug dealing, or 2) a certain indictable act (one of the 88 statutes).
What Is An “Enterprise?”
An enterprise is a group of persons. It can be as little as two. Must be more than one. However, it is important to remember that an enterprise can be one person acting on behalf of a group. Even though you may think to be defined as an enterprise requires a gang or mob, an enterprise can also be an association, partnership, organization such as a corporation, or even a legal entity. This gives RICO its very extensive reach over the many people who can be prosecuted for a crime.
What Are Securities?
Securities are investments that can be negotiable or non-negotiable or financing instruments that can be purchased or sold on the financial market. Many people have heard of securities but do not realize it because they are rarely called securities in the general public. Often you hear about them when they are referred to as stocks and bonds. These are the goods being talked about the stock exchange and in the news.
Why You Need A Federal Defense Attorney
Securities fraud alone and attached to RICO is a federal crime. Federal crimes are far more serious than state crimes. Both because of the type of crime and because of the penalties that might follow A federal defense attorney will be knowledgeable of what is needed to help defend your case and will have the skills to investigate your case and to provide you with the advice that is most beneficial to you.
The Statute On RICO
The law that prohibits RICO is 18 U.S.C § 1962. While the statute is very dense, it essentially prohibits you from taking part in racketeering activity that is connected to an enterprise. One of the activities must be a crime that is known as a predicate offense. Finally, for you to have violated RICO, you must have committed one of the predicate offenses more than two times in the last ten years.
How RICO And Securities Fraud Are Related
A reading of the statute might make you think that you must have been in the business of collecting unlawful debts to be charged with RICO. But RICO is broader than that. The first sentence of the statute says that “(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity….” RICO is based on receiving some sort of income by a pattern prohibited acts.
As mentioned above, RICO requires an individual to take part in a predicate offense. Securities Fraud, while not written directly into the 18 U.S.C § 1962, is a predicate offense. This is likely because of the main result of securities fraud being that you are alleged to have received an income from a fraudulent act. Generally, if you are charged with RICO for securities fraud, the government is alleged that you have been working with someone else, maybe a co-worker or your lawyer, to carry out these acts.
Take the Martin Shkreli, case it was found that he had been making false statements to investors, saying that the companies were making more and worth more than what they were really worth. Then he and his lawyer were modifying documents to help make these false statements look true.
The Statute On Securities Fraud
The list of predicate offenses is an extensive list including securities fraud. Securities fraud has to do with fraudulent acts when dealing with investments. This usually includes the sale of investments, but could also include the purchase as well.
The Statute That Makes Securities Fraud Illegal.
18 U.S. Code § 1348 Securities and commodities fraud regulates those
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)).
While the statute is quite dense, it is prohibiting people from fraudulently scheming a person to purchase a security for the purpose of receiving money or property in exchange for that security or class of securities. Essentially the statute prohibits you from fraudulently selling or purchasing securities In order to make the statute more clear and to show you what the government must prove; the statute is broken down into elements of the crime below.
The elements of a crime can vary from jurisdiction to jurisdiction, regardless of the fact that you are federally prosecuted. Generally, this will depend on the circuit court decisions. Regardless, the following elements are similar to what will likely be required for your case.
- Executes or attempts to execute a scheme,
- To defraud any person in connection with any security or class of securities, or
- To obtain, either falsely or fraudulently any money or property in connection with the purchase or sale of any security or class of securities.
What Do These Elements Mean?
This element goes to your state of mind. It requires that the government must prove that you know your actions as you were doing them. In other words, the act could not have been on accident.
Executes or attempts to execute a scheme
The second element makes it clear that this act would be a crime regardless of being completed or attempted. At the same time, it requires that you have a plan. For example, if you told a potential investor that you could sell some shares with a certain price, but the price you gave was more than they were selling and you did this to make a profit. That could be the scheme.
For example, in the case of Martin Shkreli, his actions included falsely telling investors for two of his hedge funds about their financial performance. This included creating false reports and sending them to current investors. The reason for making this statement was to get more investments and grow the hedge funds. This would be a scheme because it is a plan, one that made a false statement to make a profit.
To defraud any person in connection with any security or class of securities, or
Because of the “or” between elements 3 and 4, they are alternatives to the another. In other words, the government would not be required to prove both of those elements.
An example of defrauding a person in connection with a security would be to explain to them that you have come across a class of securities for a good price and that the price will be going up soon. When in fact, the price will not be going up because the company has actually been losing profits.
Look back at the Martin Shkreli example, because he was not telling the truth about the financial performance of the two companies and as a result investors were purchasing securities. These investors were relying on the statements that were being made, without those statements it is unlikely that they would have invested in the companies.
To obtain, either falsely or fraudulently, any money or property in connection with the purchase or sale of any security or class of securities
Here, this would be based on the facts of your case. In the Martin Shkreli case, the government found that he made nearly $7.4 million in income based off of the false statements that he made to these investors because they continued to invest in his businesses.
How The Courts Have Affected Securities Fraud
For the most part, courts have been split on the actions that are required to be sued for securities fraud under RICO. While less applicable to the criminal aspect, in the civil aspect, courts have questioned whether one can be sued or punished for the purchase of securities.
Methods of Investigating Securities Fraud
Because your case is charged as a federal crime, it will be prosecuted by the United States Attorney’s office. However, in the investigation of your case, more offices will be involved since it takes a lot of collaboration to investigation a securities fraud case.
The offices that may be investigating your case may be both task forces and/or investigative agencies; this includes but is not limited to the Internal Revenue Service-Criminal Investigation, U.S. Postal Inspection Service, U.S. Secret Service, Securities and Exchange Commission, Federal Trade Commission, and Commodity Futures Trading Commission.
What Happens If You are Suspected of Committing Securities Fraud?
Generally, the start of a securities fraud case comes from a tip or a whistleblower. But do note, that this is not the only way. Based on a tip it is likely that the Securities and Exchange Commission (the SEC) will investigate your case. Their findings will likely be shared with the Federal Bureau of Investigations (the FBI) who will then work with the US Attorney’s office. It is unlikely that you would know that you are being investigated.
The Seriousness Of A Federal Charge
First, it is important to realize that under RICO, your charges will include both RICO and the predicate offense. With that being said, it is likely that you will have at least three charges against you. More realistically, you likely have many more charges than just a few because the government will look at all of your alleged actions in the last ten years.
RICO itself can have various types of penalties depending on what the predicate offense on is alleged to have committed. But for RICO where securities fraud is the predicate offense, the penalty is up to 20 years in prison and a fine. It is important to remember that even if the fine seems small for the crime, in cases of fraud the government will often look at the money earned and the proceeds derived from fraud. The government may double these proceeds as a fine and then require the defendant to pay whichever is higher, the fine or the money earned.
One of the biggest unforeseen penalties is that you probably did not realize that the government may double the proceeds (explained above) to determine the amount of money you are required to pay back. This could amount to large amounts of money. Additionally, if you purchased any good from these proceeds, those goods could be taken by the government. These goods could include gifts that you purchased for others.
There are non-legal penalties that you could also face. It may be that your entire work experience revolves around investment and banking. Your future job prospects could be harmed because you have been charged or convicted with fraud. The issue with fraud is that it is considered a crime of dishonesty. A crime of dishonesty comes with many types of backlash such as you being seen as an untrustworthy person.
Generally when charged with RICO and one of its predicate offenses, this will include multiple charges. This is because RICO requires that you committed at least two offenses in 10 years. It is likely that you are alleged to have committed a single predicate offense twice. But you also could be alleged to have committed more than one predicate offense twice.
There is a likelihood that you are charged with conspiracy because you have acted with other individuals
In addition to criminal charges, you could be liable for civil lawsuits as well. The RICO statute applies to both criminal and civil aspects of the law. Therefore, you could be sued by private entities for your alleged actions.
As with any criminal case, it will be important that you have a defense for against the government’s case against you. Every case is different, from specific facts to the application of the law. A defense could come in many forms, from specific facts that may be wrong to your state of mind. Each one of those elements needs to be proven beyond a reasonable doubt, your facts and defenses can help cast doubt upon those elements.
What To Do If Accused Of Federal Securities Fraud
It is likely that you will not know of this investigation until you are being indicted. If you find that you are being investigated, stop performing any actions that are subject to investigation. Do not destroy anything. If you are contacted by law enforcement for any questions or to produce any documents, make sure to seek the advice of a federal criminal defense attorney.