Criminal enforcement of Florida's securities laws.

• Author: Barber, Tom

In Florida, state law enforcement authorities have a variety of tools at their disposal to combat securities scams. These include F.S. Ch. 517, the "Florida Securities and Investor Protection Act," and other related statutes prohibiting theft, racketeering, organized schemes to defraud, and aggravated white collar crime. (1) Although the primary securities statutes have been on the books since the early 1930s, and securities prosecutions are regularly brought throughout Florida, many lawyers are unfamiliar with the law in this area.

In the wake of "Enron," "Martha Stewart," and various other high profile white collar scandals, law enforcement authorities have indicated a greater willingness to prosecute white collar crime of all varieties, including securities crimes. This article discusses the substantive law applicable in a Florida criminal securities prosecution, along with various practical issues that typically arise in these cases.

Definition of "Security" and the Role of Exemptions

All criminal securities prosecutions depend upon the existence of a "security," as defined by statute and case law. The definition of "security" in F.S. [section] 517.021 is quite broad. A "security" may include the obvious--traditional stocks and bonds--as well as less obvious instruments, such as "notes" or "investment contracts." (2) The breadth of the definition of "security" may come as a surprise to many practitioners. Even something as basic as a promissory note can, under the right circumstances, satisfy the statutory definition of "security." (3)

In Florida, the statutory definition of "security" found in F.S. [section] 517.021 is not the only source of authority on this issue. Courts "look beyond Ch. 517 to a broader definition of a security as found in case law." (4) When venturing beyond the confines of Ch. 517, Florida courts utilize the so-called "Howey test." (5) This test comes from the U.S. Supreme Court's opinion in Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293 (1946). In Howey, the Court identified the following factors to determine whether a particular investment is a security: 1) an investment of money, 2) in a common enterprise, and 3) an expectation of profits to be derived solely from the efforts of another. (6)

When the state alleges that a securities crime has been committed, it has the burden of proving that the statutory definition of "security" has been satisfied. The state is not entitled to a pretrial determination, or a jury instruction, that a particular instrument meets the statutory definition of "security." (7) Even when there can be no genuine dispute that a particular instrument meets the statutory definition of "security," the defendant is entitled to have this issue decided by a jury. (8)

In some cases, the issue whether the statutory definition of "security" can be proven by the state is hotly contested. In these cases, the definition of "security" is the paramount issue for trial, and both sides may call expert witnesses, present detailed and lengthy documentary evidence, and make highly technical legal arguments in support of their respective positions. Sometimes the application of technical exemptions becomes an important part of the trial. When the definition of "security" is the focus of the case, a criminal securities trial may end up being more like a civil trial than a typical criminal trial.

On the other hand, the fact that the defendant uti lized a "security" as defined by F.S. [section] 517.021 may not be seriously disputed in many cases. In some instances, the case may have made its way to criminal enforcement authorities as a result of a concurrent administrative investigation by the Department of Financial Services, Office of Financial Regulation (formerly the Department of Banking and Finance). (9) In these cases, the administrative investigators have usually analyzed the issues and concluded that the definition of "security" is satisfied.

In a well-planned securities prosecution, the state will obtain an opinion from an expert on this critical question prior to filing criminal charges. Florida case law specifically allows the state to call an expert witness in a securities prosecution to assist the jury in understanding the statutory definition of "security." (10) An expert may also be called upon to provide testimony dealing with the applicability of exemptions and the materiality of certain statements or omissions. Expert testimony on behalf of the state may not be precluded on the grounds that it includes an ultimate issue to be decided by the trier of fact. (11)

Because the statutory definition of "security" is so broad, this area of Florida law provides a significant trap for unwary lawyers--especially those practicing in transactional fields. Lawyers need to be careful when asked by a client to draft documents that could be used by the client to obtain money from investors. Lawyers asked to draft documents that could satisfy the broad statutory definition of "security" should advise their client to seek the advice of a competent securities law specialist. If an accurate analysis of the securities law issues does not take place, the lawyer could unwittingly draft a document that is later used as a basis for the client's criminal prosecution. Needless to say, this kind of legal work does not make for happy clients. (22)

The Florida Securities and Investor Protection Act includes a complicated and technical series of exemptions. (13) In certain fact-specific circumstances, securities do not have to be registered, and persons selling securities do not have to have a license. Thus, even when the state is able to prove that the defendant utilized a "security," liability for some securities crimes can be still avoided if the defendant is able to prove the applicability of one of the statutory exemptions. If exemptions are part of a securities case, experts may become necessary on both sides.

The statutory exemptions may provide fertile ground for a defendant to create reasonable doubt in the minds of jurors when the state charges a violation of F.S. [section] 517.07 (registration of securities) or F.S. [section] 517.12 (registration of securities dealers). The exemptions do not, however, allow a defendant to avoid criminal responsibility for securities fraud. (14)

The existence of a statutory exemption is an affirmative defense that the defendant must prove. (15) Put differently, the state does not have to prove the absence of an exemption as part of its case.

Statutes Typically Involved in Securities Prosecutions Where a "security" as defined by F.S. [section] 517.021 is arguably present, enforcement authorities may be able to bring charges under a number of separate statutes. The sections that follow will discuss some of those statutes in detail.

* Selling Unregistered Securities--F.S. [section] 517.07

The sale of unregistered securities is perhaps the most basic of all securities offenses. Pursuant to F.S. [section] 517.07, many securities must be registered with the appropriate arm of the Department of Financial Services. No security may be sold, or offered for sale, unless it is exempt under F.S. [section] 517.051; or is sold in a transaction exempt under F.S. [section] 517.061; or is a federally covered security; or is registered pursuant to the terms of Ch. 517. (16)

Section 517.07 does not specifically include criminal penalties. Criminal sanctions for violation of F.S. [section] 517.07 are set forth in [section] 517.302, which provides that any violation of any part of Ch. 517 is a third degree felony, punishable by up to five years in prison. (17)

There are only two elements to this crime: a "sale" or an "offer to sell," and an unregistered security. (18) In this context, the terms "sale" and "sell" are defined in F.S. [section] 517.021(19) as follows:

"Sale" or "sell" means any contract of sale or disposition of any investment, security, or interest in a security, for value. With respect to a security or interest in a security, the term defined in this subsection does not include preliminary negotiations or agreements between an issuer or any person on whose behalf an offering is to be made and any underwriter or among underwriters who are or are to be in privity of contract with an issuer. Any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing shall be conclusively presumed to constitute a part of the subject of such purchase and to have been offered and sold for value. Every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert into another security or another issuer, is considered to include an offer of the other security.

"Offer to sell," "offer for sale," or "offer" means any attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, or an investment or interest in an investment, for value. F.S. [section] 517.021(15).

Violation of F.S. [section] 517.07 is a strict liability offense. (19) To obtain a conviction, the state only needs to prove that the defendant sold, or offered to sell, an unregistered security; intent is not an element of the crime. Neither ignorance of the registration requirement nor the defendant's good-faith reliance on the advice of counsel...