Summary
Twelfth Survey of White Collar Crime
Rule 10b-5 and section 10(b) of the Securities Exchange Act of 1934 are the primary sources of law used to prosecute criminal securities fraud at the federal level. Fraud charges can involve insider trading, misrepresentation, parking or broker-dealer fraud. Misrepresentations include affirmative statements and omissions. The US Department of Justice has sole authority to bring criminal securities fraud actions, but it often initiates cases based on referrals from formerly civil matters investigated by the Securities and Exchange Commission.See the full content of this document
Extract
Securities fraud.
I. INTRODUCTION II. ELEMENTS OF THE OFFENSE
A. Substantive Fraud 1. Material Omissions and Misrepresentations a. Misstatements and Omissions b. Materiality c. Scienter d. Reliance e. Willfulness 2. Insider Trading a. The Classical Theory b. The Misappropriation Theory c. Strict Regulation under Rule 14e of Nonpublic Information Regarding Tender Offers 3. Parking 4. Broker-Dealer Fraud B. Offer, Purchase, or Sale 1. To Whom the 1933 and 1934 Acts Apply 2. Definition of "Security" 3. Definition of "Offer" and "Sale": The 1933 Act 4. Definition of "Purchase" and "Sale": The 1934 Act C. Use of Interstate Commerce or the Mails III. DEFENSES A. Intent-Based Defenses 1. Lack of Fraudulent Intent 2. "No Knowledge" of the Substantive Rule 3. Good Faith 4. Reliance on Counsel B. Reliance-Based Defenses C. Other Defenses IV. ENFORCEMENT MECHANISMS A. SEC Enforcement 1. Development of an Enforcement Action 2. Administrative Proceedings 3. Cease and Desist Authority 4. Injunctive Actions 5. International Enforcement B. Criminal Enforcement 1. Criminal Referrals 2. Parallel or Subsequent Suits 3. Contempt Proceedings V. PENALTIES VI. RECENT DEVELOPMENTS I. INTRODUCTION Seven statutes regulate securities transactions.(1) In the aftermath of the stock market crash of 1929 Congress passed the most important of these statutes, the Securities Act of 1933 ("1933 Act") and the Securities Exchange Act of 193 ("1934 Act"). The purpose of both Acts is to ensure vigorous market competition by mandating full and fair disclosure of all material information in the marketplace. This article focuses on [sections] 10(b) of the 1934 Act(2) and Rule 10b-5 promulgate by the Securities and Exchange Commission ("SEC") under the 1934 Act outlining the elements of securities fraud by describing the various activities considered to be substantive frauds under these laws. In addition, [sections] 32(a) of the 1934 Act(4) is examined to illustrate how civil causes of action can rise to the level of criminal prosecutions where there have been willful violations of [sections] 10(b) or Rule 10b-5. This article also explains common defenses to charges of substantive fraud as well as the enforcement mechanisms available to the government. Finally, it is important to note that this article only examines federal securities law which must always be analyzed in conjunction with the applicable state "blue sky"(5) laws which regulate the offering and sale of securities in each state.(6) II. ELEMENTS OF THE OFFENSE Although both the 1933 Act and the 1934 Act provide for various types of criminal conduct,(7) the sections employed most frequently in criminal prosecutions for fraud in the purchase or sale of securities are [sections] 10(b) of the 1934 Act,(8) Rule 10b-5 promulgated thereunder,(9) and [sections] 32(a) of the 1934 Act.(10) To maintain a securities fraud cause of action, three elements must be proven: (1) the existence of a substantive fraud, including material misrepresentations or omissions, a scheme or artifice to defraud, or a fraudulent act, practice, or course of business; (2) in connection with the purchase or sale of a security or in the offer or sale of a security; (3) employing the use of interstate commerce or the mails. Each area of substantive fraud has its own necessary elements for establishing a cause of action. For the government to pursue a criminal prosecution, in addition to the three elements set out above, it must satisfactorily prove that the defendant willfully intended to commit the prohibited act." Securities fraud causes of action can be criminal, civil, or administrative in nature.(12) Whereas civil and administrative proceedings may be brought by the SEC to investigate potential violations and to rectify past and prevent future violations, the Department of Justice ("DOJ") has sole jurisdiction over criminal proceedings.(13) Most, but not all, criminal proceedings are initiated as the result of an SEC investigation and a subsequent SEC criminal referral to the DOJ.(14) A. Substantive Fraud This section discusses four types of fraud that can be a basis for a securities violation: (1) Rule 10b-5 material omissions and misrepresentations; (2) insider trading; (3) parking; and (4) broker-dealer fraud. 1. Material Omissions and Misrepresentations Material misrepresentations and omissions give rise to the most common type of securities fraud action. Rule 10b-5 proscribes any and all such false statements if they are made in connection with the purchase or sale of securities.(15) The five elements of a Rule 10b-5 cause of action that must be alleged against a defendant are: (a) a false statement or omission, (b) of a material fact, (c) made with scienter, (d) justifiably relied on by plaintiff, which (e) was causally related to plaintiff's injury.(16) Once the elements of the Rule 10b-5 cause of action are met, a criminal penalty ca...See the full content of this document
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