Federal Securities Fraud Defense Attorney

Securities prosecutions arrive with a civil case attached. The SEC is usually there first, and what happens in that proceeding shapes the criminal one.

The two statutes are not interchangeable. Which one the government charges tells you a great deal about how strong it thinks its case is.

Two statutes, and why the choice matters

Section 10(b) and Rule 10b-5. The classic route, under 15 U.S.C. § 78j(b) and the SEC’s Rule 10b-5. It prohibits fraud in connection with the purchase or sale of a security. Criminal liability requires willfulness, and the offense carries up to 20 years under § 78ff.

Section 1348. Enacted as part of Sarbanes-Oxley, 18 U.S.C. § 1348 prohibits schemes to defraud in connection with securities or commodities. It was deliberately modelled on the mail and wire fraud statutes rather than the securities laws, which means the government need not establish the “in connection with the purchase or sale” nexus and the other technical requirements developed in decades of 10b-5 civil litigation. Maximum 25 years.

Prosecutors increasingly favor § 1348 for exactly that reason. If it appears on your indictment, the government has chosen the path of least resistance — and the defense has to be built around a fraud theory rather than a securities-law theory.

The elements under Rule 10b-5

1. A material misrepresentation or omission, or a manipulative or deceptive device;
2. Scienter — intent to deceive, manipulate, or defraud;
3. In connection with the purchase or sale of a security;
4. Use of interstate commerce or a national exchange; and
5. For criminal liability, that the defendant acted willfully.

Materiality is the element most often contested successfully. A misstatement is material only if a reasonable investor would consider it important. Forward-looking projections, optimistic characterisations, and corporate puffery are generally not material as a matter of law, and the line between aggressive promotion and actionable misrepresentation is where a great many of these cases are actually fought.

Insider trading: two theories, no statute

There is no federal statute called “insider trading.” Liability is a judicial construction on Rule 10b-5, and it runs on two theories:

The classical theory. A corporate insider who trades on material non-public information breaches a duty owed to the shareholders of their own company. From Chiarella and Dirks v. SEC.

The misappropriation theory. Confirmed in United States v. O’Hagan, 521 U.S. 642 (1997). A person who misappropriates confidential information in breach of a duty owed to the source of the information — an employer, a client, a family member — commits fraud on that source, even with no relationship to the company traded.

The misappropriation theory is what reaches lawyers, bankers, consultants, printers, and spouses. It is also where the duty question becomes genuinely contestable: whether a duty of trust and confidence existed at all is an element, and Rule 10b5-2 addresses when family and personal relationships create one.

Tippee liability and the personal benefit test

Where information is passed rather than traded on directly, Dirks requires that the tipper breached a duty for a personal benefit, and that the tippee knew or should have known of that breach. No benefit to the tipper means no liability for anyone downstream.

In Salman v. United States, 580 U.S. 39 (2016), the Supreme Court held that a gift of confidential information to a trading relative or friend satisfies the personal benefit requirement without proof of anything pecuniary flowing back. That broadened tippee liability considerably.

Remote tippees remain the strongest defensive position. The further down a chain of transmission a defendant sits, the harder it is to prove they knew the information originated in a breach — which is an element, not an inference.

Sentencing: gain, not loss

Most fraud sentencing runs on loss. Insider trading is different: U.S.S.G. § 2B1.4 uses the gain resulting from the offense, which means the profit made or the loss avoided.

Broader securities fraud runs through § 2B1.1 on the loss table, with the market-loss calculation in these cases being genuinely complex — separating price movement caused by the alleged misstatement from movement caused by everything else happening in the market is expert work, and it moves the range materially.

Enhancements apply for sophisticated means, for the number of victims, for acting as an officer or director of a public company, and for being a registered broker or investment adviser.

The parallel SEC proceeding

The SEC usually arrives first, and its investigation is not the criminal case — but it feeds it. The Commission can refer matters to the Justice Department, and the two often coordinate.

The traps are specific. Testimony given under oath in an SEC investigation is available to prosecutors. A Wells submission arguing your position on the merits becomes a written statement of your account. Settling with the Commission on terms containing factual admissions can effectively concede the criminal case.

Do not respond to an SEC subpoena or agree to testify without counsel who is thinking about the criminal exposure at the same time. Asserting the Fifth Amendment in an SEC proceeding has civil consequences — an adverse inference is permitted — and that trade-off has to be made deliberately.

Crypto and digital asset cases

Whether a particular digital asset is a “security” remains genuinely unsettled, and it is a threshold element rather than a technicality. Where the government charges securities fraud in connection with a token, the Howey analysis is a live defense.

Note however that prosecutors frequently avoid the question entirely by charging wire fraud instead, which requires no security at all. A defense built solely on the asset’s classification can win the securities count and lose the case.

Related pages

White collar defense overview · Wire fraud · Money laundering · Federal sentencing guidelines