Criminal Defense Lawyers

What Is Securities Fraud? Complete Legal Guide for the Accused

You’ve just recieved a letter from the SEC. Or maybe FBI agents showed up at your office. Or your company’s general counsel pulled you aside to say their investigating “accounting irregularities.” Your heart’s pounding. Your hands are shaking. And you keep thinking the same thing over and over: This can’t be real. This must be some kind of mistake.

If your in this situation right now, your probably terrified. That’s completely normal. The term “securities fraud” carries enormous weight—images of handcuffs, headlines, prison. But before you spiral further into panic, you need to understand something critical: Not every financial mistake, accounting error, or business failure is securities fraud. The legal definition is actually much more specific then most people realize.

This guide explains exactly what securities fraud is, what elements prosecutors must prove, and what you should do if your facing an investigation or charges. Because understanding the law is you’re first defense.

The Core Legal Definition: What Securities Fraud Actually Means

Securities fraud is the intentional deception of investors or manipulation of financial markets in connection with the purchase or sale of securities. Notice the critical word there: intentional. This isn’t about accidents. This isn’t about mistakes. This isn’t even about negligence.

The federal statute that governs most securities fraud cases is 18 U.S.C. § 1348, which states that it’s illegal when someone “knowingly executes, or attempts to execute, a scheme or artifice to defraud any person in connection with any security.” The other major legal foundation is Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which prohibits using “any device, scheme, or artifice to defraud” in connection with securities transactions.¹

Let’s break down what this actually means in plain English.

What Qualifies as a “Security”?

First, your dealing with a “security.” This includes:

• Stocks (shares of companies)
• Bonds and debentures
• Options and derivatives
• Investment contracts
• Certain cryptocurrency tokens
• Mutual funds and ETFs

Basically, if it’s an investment vehicle where people put money in expecting returns based off the efforts of others, it’s probly a security.

The “In Connection With” Requirement

Second, the fraud must be “in connection with the purchase or sale” of these securities. This is important because it means not every corporate fraud qualifies as securities fraud. If you embezzle company funds but that conduct isn’t tied to buying or selling securities, it might be theft or wire fraud—but not securities fraud.²

However, courts interpret “in connection with” pretty broadly. If your misrepresentation could influence someone’s decision to buy or sell securities, even if that wasn’t you’re primary intent, it likely meets this requirement.

The Five Critical Elements Prosecutors Must Prove

Here’s what really matters when your facing potential securities fraud charges: The government must prove five seperate elements beyond a reasonable doubt. If they can’t prove even one of these, the case should fail. Let’s look at each one.

Element 1: Material Misrepresentation or Omission

First, there must be a misrepresentation (false statement) or omission (failing to disclose something) that’s material. “Material” is a legal term with a specific meaning. According to the Supreme Court’s decision in Basic Inc. v. Levinson, information is material when “there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.”³

This is actually a higher bar then many people think. Not every incorrect statement is material. Consider these examples:

Likely Material:

• Overstating revenue by 30% in financial statements
• Hiding a pending $50 million lawsuit against a $100 million company
• Failing to disclose the CFO is under criminal investigation
• Lying about FDA approval for a medical device company’s main product

Likely NOT Material:

• Overstating revenue by 0.5% due to an accounting disagreement
• Saying you’re product is “industry-leading” when it’s actually ranked third
• Projecting 30% growth when internal estimates show 25% (within reasonable range)
• Minor errors in non-financial disclosures that don’t affect company value

The materiality threshold is your friend if your defending against securities fraud allegations. An experiance securities defense attorney can challenge whether the alleged misstatements were actually significant enough to meet this legal standard.

Element 2: Scienter (Criminal Intent) – The Most Critical Element

Here’s the element that seperates securities fraud from honest mistakes, and it’s the most important thing you need to understand: Prosecutors must prove you had scienter—a legal term meaning you either knew the information was false or acted with reckless disregard for whether it was true or false.

This is what the “knowingly” language in 18 U.S.C. § 1348 refers to. The government must prove your mental state. They must show you intended to decieve, or at minimum, that you were so reckless about the truth that it amounts to the same thing.

What This Means for You

If you genuinely believed the information you provided was accurate, even if you were wrong, that’s not fraud. If you relied on your accounting team’s analysis and they got it wrong, that’s typically not fraud on your part (unless you ignored obvious red flags). If you made optimistic projections that didn’t pan out, that’s not fraud unless you never believed those projections in the first place.

Scienter is usually proven through circumstantial evidence because prosecutors can’t read your mind. They look for things like:

• Emails or documents showing knowledge: “I know these numbers are inflated but we need to close this funding round” = evidence of scienter
• Warnings you ignored: If you’re compliance officer or auditor flagged issues and you buried them, that suggests knowledge
• Patterns of conduct: Repeatedly making the same type of misstatement suggests it wasn’t an accident
• Concealment efforts: Destroying documents or lying to auditors suggests you knew something was wrong
• Motive and opportunity: While not enough alone, financial incentive combined with other evidence strengthens the case

The “Honest Mistake” Defense

This is where alot of securities fraud cases get won or lost. The question isn’t “was the information false?” The question is “did you know it was false or act recklessly?”

Consider these scenarios:

Scenario 1: NOT Fraud
You’re a CEO who signed off on financial statements prepared by your CFO and accounting team. The revenue recognition turned out to violate GAAP, but you aren’t an accountant and you relied on your team’s expertise. When auditors questioned it, you immediately directed your team to investigate and correct it.

Why this isn’t fraud: You didn’t have knowledge it was wrong, you relied on professionals, and you corrected it when discovered. No scienter.

Scenario 2: Likely IS Fraud
You’re a CEO who’s CFO warns that certain revenue shouldn’t be recognized yet under accounting rules. You respond “I don’t care what GAAP says, we need to hit our numbers or the stock tanks.” You then instruct them to recognize the revenue anyway and make sure “nothing looks funny in the footnotes.”

Why this is fraud: You had knowledge the accounting was improper, you did it anyway for personal gain (stock price), and you actively concealed it. Clear scienter.

The diffrence between these scenarios is everything. That’s why immediately documenting concerns, asking questions, and relying on experts matters so much when your a corporate officer.

Element 3: Reliance

Prosecutors or plaintiffs must prove that investors actually relied on the misrepresentation when making investment decisions. In other words, the false information must have influenced they’re choice to buy or sell securities.

For publicly traded companies, this is typically established through something called the “fraud-on-the-market” theory. This legal doctrine presumes that all material public information affects stock price, and investors rely on the integrity of that price. So if you made a materially false public statement, investors who traded at the resulting price are presumed to have relied on it—even if they never personally read you’re statement.⁴

However, this presumption can be rebutted. If you can show that:

• The information wasn’t widely disseminated
• Market price didn’t actually respond to the information
• Investors had access to contradictory information
• Sophisticated investors did independant due diligence and didn’t rely on your statements

…then the reliance element might fail.

For private securities transactions (like private placements), prosecutors or plaintiffs must prove that each individual investor actually relied on the specific misrepresentation. This is a higher bar and creates more defense opportunities.

Element 4: Causation

There must be a causal connection between the misrepresentation and the investment decision or loss. This is actually two seperate requirements:

Transaction causation (“but for” causation): The investor wouldn’t have made the transaction but for the misrepresentation. If they would’ve invested anyway based on other factors, this element fails.

Loss causation: The misrepresentation must have actually caused the economic loss. If the stock dropped because of general market conditions or other factors unrelated to you’re fraud, this element might not be satisfied.⁵

Defense attorneys can sometimes get charges dismissed or reduced by showing the alleged losses were caused by market forces, business conditions, or other factors—not the defendant’s conduct.

Element 5: Damages or Loss

Finally, someone must have suffered actual financial harm. The amount of loss is critical because it drives both civil damages and criminal sentencing under the Federal Sentencing Guidelines.

What counts as “loss” can be disputed:

• Actual loss: The money investors actually lost
• Intended loss: What you intended them to lose (can be higher than actual)
• Gain to defendant: Sometimes used instead of loss amount

For sentencing purposes in criminal cases, the loss amount under Federal Sentencing Guidelines § 2B1.1 drives the calculation. The diffrence between a $1 million loss and a $10 million loss can mean several additional years in prison.

Common Types of Securities Fraud

Securities fraud comes in many forms. Understanding the different types helps you assess whether you’re situation might actually involve fraud—or whether its something else entirely.

Insider Trading

This is probly the most well-known type. Insider trading occurs when someone trades securities based off material non-public information. There’s two main legal theories:

Classical Theory: A corporate insider (officer, director, employee) breaches a fiduciary duty to shareholders by trading on confidential information. For example, a CEO who learns the company’s quarterly earnings will badly miss estimates and sells his stock before the announcement.⁶

Misappropriation Theory: An outsider (like a lawyer or consultant) breaches a duty to the source of the information. This was established in U.S. v. O’Hagan, where a lawyer traded on information about a client’s planned acquisition.⁷

Recent high-profile insider trading cases include congressional stock trades based on confidential briefings and hedge fund managers receiving tips from corporate insiders.

Ponzi Schemes

Named after Charles Ponzi, these schemes pay returns to earlier investors using money from new investors rather then from actual profits. Bernie Madoff’s $65 billion scheme was the largest in history.

The key characteristics:

• Promises of high returns with little risk
• Consistent returns regardless of market conditions (unrealistic)
• Unregistered investments or secretive strategies
• Difficulty receiving payments (when redemptions exceed new investments)

Many Ponzi schemes start innocently—someone has early investment success, promises returns to friends, then when returns fall short, uses new money to pay earlier promises. It snowballs from their.

Pump-and-Dump Schemes

Fraudsters artificially inflate (pump) a stock’s price through false or misleading statements, then sell (dump) they’re shares at the inflated price before the truth comes out and the price collapses.

This is especially common with penny stocks and low-volume securities. Modern variations use social media, email spam, or online forums to spread hype. The recent meme stock fenomena has given pump-and-dump schemes new life, with coordinated efforts on Reddit, Twitter, and other platforms.⁸

Accounting Fraud

This involves manipulating financial statements to make a company appear more profitable or valuable then it actually is. Common methods include:

• Revenue recognition fraud: Recording sales that haven’t occured or accelerating revenue recognition
• Expense manipulation: Capitalizing expenses that should be expensed immediately
• Off-balance-sheet transactions: Hiding liabilities (Enron’s strategy)
• Improper reserves: Manipulating loss reserves to smooth earnings

Recent examples include Theranos (falsely claiming breakthrough medical technology), Luckin Coffee (fabricating sales figures), and Wirecard (inventing billions in assets that didn’t exist).

Market Manipulation

Beyond pump-and-dump, there’s various ways to artificially manipulate securities prices:

• Wash sales: Simultaneously buying and selling the same security to create artificial volume
• Painting the tape: Executing trades near market close to affect closing price
• Spoofing: Placing orders with intent to cancel before execution to trick other traders
• Layering: Placing multiple orders at different prices to create false impression of demand

High-frequency trading has created new forms of market manipulation that regulators are still trying to understand and police.

Broker-Dealer Fraud

This involves misconduct by brokers or financial advisors:

• Churning: Excessive trading to generate commissions
• Unauthorized trading: Making trades without client permission
• Unsuitable recommendations: Recommending investments that don’t fit client’s risk profile
• Selling away: Selling securities outside the firm’s supervision
• Misappropriation: Stealing client funds

Cryptocurrency and Modern Schemes

The 2024 FTX collapse showed how securities fraud has evolved. Sam Bankman-Fried recieved a 25-year sentence for misappropriating billions in customer funds and lying to investors. Other modern schemes include:

• ICO (Initial Coin Offering) frauds
• NFT rug pulls
• DeFi (Decentralized Finance) scams
• Fake cryptocurrency exchanges

Regulators are still figuring out which cryptocurrency assets are securities, making this a rapidly evolving area of law.

What’s NOT Securities Fraud: Critical Distinctions

This section might be the most important for anyone who’s worried they’re facing potential charges. Alot of corporate conduct that feels wrong or looks bad isn’t actually securities fraud. Here’s what doesn’t qualify:

Business Failures and Poor Decisions

Your company went bankrupt. You made a bad acquisition. Your product failed in the market. Your strategy didn’t work. None of that is fraud.

The law doesn’t make business failure criminal. If you honestly believed in you’re business strategy and it failed, that’s capitalism—not securities fraud. Investors take risks. Sometimes those risks don’t pay off. That’s not illegal.

Honest Mistakes and Good Faith Errors

You applied the wrong accounting standard. You misunderstood a complex regulation. You relied on faulty data from a vendor. If you genuinely didn’t know it was wrong, it’s not fraud.

The scienter requirement protects people who make honest mistakes. If you can show you:

• Relied on professionals (lawyers, accountants, consultants)
• Disclosed uncertainties and assumptions
• Corrected errors when discovered
• Didn’t personally benefit from the error

…then you’ve got a strong defense that this was mistake, not fraud.

Negligence vs. Fraud

Negligence means you failed to meet the standard of care—you should’ve known better, you should’ve checked more carefully, you should’ve caught the error. But negligence isn’t fraud.

Securities fraud requires proof beyond a reasonable doubt that you acted with intent to deceive or reckless disregard for truth. That’s a much higher bar then mere negligence. Even gross negligence typically isn’t enough for criminal fraud.

Aggressive But Legal Practices

Putting you’re company in the best light. Making optimistic projections. Emphasizing the positive. Using aggressive (but legal) accounting methods. None of that is automatically fraud.

Companies are allowed to:

• Highlight positive developments while downplaying negatives (to a point)
• Make forward-looking statements with meaningful cautionary language
• Use accounting methods that are aggressive but within GAAP
• Engage in puffery (“best in class,” “industry leader”)

The line between aggressive marketing and fraud is the intent to deceive on material facts.

Criminal vs. Civil Securities Fraud: Two Different Systems

Here’s something that confuses alot of people: Securities fraud can be prosecuted criminally, civilly, or both at the same time. Understanding the diffrence is critical.

Criminal Securities Fraud (DOJ Prosecution)

Who prosecutes: U.S. Attorney’s Office (Department of Justice)

Burden of proof: Beyond a reasonable doubt (very high standard)

Potential outcomes:

• Federal prison (up to 25 years under 18 U.S.C. § 1348)
• Criminal fines (up to $5 million for individuals)
• Probation/supervised release
• Restitution to victims
• Forfeiture of proceeds

Your rights: Right to jury trial, right against self-incrimination (Fifth Amendment), right to counsel, presumption of innocence

Civil Securities Fraud (SEC Enforcement)

Who prosecutes: Securities and Exchange Commission (SEC) Enforcement Division

Burden of proof: Preponderance of evidence (more likely true than not—much lower standard)

Potential outcomes:

• Disgorgement (repayment of ill-gotten gains)
• Civil monetary penalties (up to 3x gains)
• Industry bars (broker-dealer, investment adviser, officer/director bans)
• Injunctions against future violations
• Asset freezes

Your rights: Can assert Fifth Amendment but SEC can draw adverse inference in civil proceeding

The Parallel Proceedings Trap

Here’s what makes this really complicated: The SEC often files civil charges first while the DOJ investigates criminal charges. This creates a massive strategic problem.

If you testify in the SEC civil proceeding, you’re testimony can be used against you in the criminal case. But if you assert you’re Fifth Amendment right not to testify in the civil case, the judge or jury in that civil case can draw an adverse inference (basically assume you’re guilty).⁹

This is why you need coordinated defense between civil and criminal counsel. Decisions about whether to settle the civil case, what to disclose, whether to testify—all of these affect the criminal case.

And here’s the kicker: Settling the SEC civil case doesn’t make the criminal case go away. The DOJ can still prosecute even if you’ve paid millions to resolve SEC charges.

Private Civil Actions

On top of SEC and DOJ, you can face private lawsuits from shareholders under SEC Rule 10b-5. These are often class actions where investors sue for losses they suffered based on you’re alleged fraud.

So you could literally be defending three seperate proceedings simultaneously:

1. SEC civil enforcement action
2. DOJ criminal prosecution
3. Private shareholder class action lawsuit

Each with different judges, different lawyers, different burdens of proof, and different potential outcomes. This is why securities fraud cases are so expensive and complex to defend.

Penalties and Consequences: What You’re Actually Facing

Let’s talk about what actually happens if your convicted of securities fraud. The statutory maximums are scary, but understanding how sentencing really works is important.

Criminal Prison Sentences

Statutory Maximums:

• 18 U.S.C. § 1348: Up to 25 years
• Securities Exchange Act violations: Up to 20 years
• Sarbanes-Oxley violations: Up to 25 years
• Securities Act violations: Up to 5 years

But here’s what matters more: Federal Sentencing Guidelines § 2B1.1. This is how sentences are actually calculated.

The Guidelines start with a base offense level, then add enhancements based on:

• Loss amount (this is the biggest factor):
  • Under $6,500: +4 levels
  • $1M – $2.5M: +16 levels
  • $25M – $65M: +24 levels
  • Over $550M: +30 levels
• Number of victims: 10+ victims = +2 levels, 50+ = +4 levels
• Sophisticated means: +2 levels
• Role in offense: Organizer/leader = +4 levels
• Obstruction of justice: +2 levels (don’t destroy evidence!)

Then reductions for:

• Acceptance of responsibility: -3 levels (if you plead guilty early)
• Cooperation: Can reduce sentence by 50% or more under § 5K1.1

Real Examples:

• Sam Bankman-Fried (FTX): 25 years for $8 billion fraud
• Elizabeth Holmes (Theranos): 11+ years for defrauding investors of hundreds of millions
• Trevor Milton (Nikola): 4 years for misleading statements about electric truck technology
• Martin Shkreli: 7 years for defrauding investors in hedge funds

As you can see, actual sentences vary dramatically based on loss amount, cooperation, and other factors.¹⁰

Criminal Fines and Restitution

Criminal fines: Up to $5 million for individuals, $25 million for organizations. Or alternatively, twice the gain or loss from the offense.

Restitution: Courts typically order defendants to pay back the amount victims lost. This is mandatory in fraud cases. Payment plans are sometimes available, but the obligation doesn’t go away—even bankruptcy typically won’t discharge it.

SEC Civil Penalties

Disgorgement: You must give back all profits you made from the fraud, plus interest.

Civil monetary penalties: Up to three times the amount of gain. Recent cases have seen penalties in the tens of millions.

Industry bars: The SEC can bar you from working in the securities industry, serving as an officer or director of a public company, or working as an investment adviser. These bars can be permanent or for a specified period.

Collateral Consequences

Beyond the direct criminal and civil penalties, a securities fraud conviction destroys your professional life:

Professional licenses:

• Attorneys face disbarment or suspension
• CPAs lose they’re license
• Brokers receive permanent FINRA bars

Employment: Good luck finding work in finance, accounting, or any position involving fiduciary responsibility. Background checks will flag the conviction forever.

Reputation: Securities fraud convictions typically generate media coverage. Google never forgets. Your professional reputation is permanently damaged.

Immigration: For non-citizens, securities fraud is typically a crime involving moral turpitude, which can result in deportation or denial of naturalization.

What to Do If You’re Under Investigation

If you’re reading this because your actually under investigation or have been charged, time is critical. Here’s what you need to do immediately.

1. DO NOT Talk to Investigators Without Counsel

This is the single most important thing: Do not speak with SEC investigators, FBI agents, or prosecutors without an attorney present. Period.

People think they can “explain their side” or “clear up the misunderstanding.” That’s not how this works. Everything you say—and I mean everything—will be documented and can be used against you. The investigators aren’t they’re to help you. They’re building a case.

If an agent contacts you:

• “I need to speak with my attorney before I can talk with you.”
• Get they’re contact information
• Do not answer any questions, even ones that seem harmless
• Immediately contact a securities defense attorney

2. Hire Experienced Securities Defense Counsel Immediately

Not you’re family lawyer. Not you’re real estate attorney. Not you’re company’s general counsel (they represent the company, not you personally).

You need an attorney who:

• Has experience defending federal securities fraud cases specifically
• Preferably former federal prosecutor or SEC attorney
• Has tried cases (many settle, but you need someone ready to go to trial)
• Understands the parallel proceedings strategy

This will be expensive—expect $500,000 to $5 million+ depending on case complexity. But it’s worth it when your facing 25 years in prison.

3. Preserve All Documents (Do NOT Destroy Anything)

Once your aware of an investigation, you have a legal obligation to preserve relevant documents. This means:

• Do NOT delete emails
• Do NOT delete text messages
• Do NOT shred documents
• Do NOT “clean up” files
• Do NOT ask IT to wipe your hard drive

Destroying evidence is a seperate crime (obstruction of justice) that carries it’s own penalties and adds +2 levels to your sentencing if convicted. Plus it makes you look guilty.

Implement a litigation hold immediately. Your attorney will help with this.

4. Do NOT Discuss the Case with Colleagues

Anyone you talk to about the case can become a witness against you. Conversations with colleagues, co-defendants, or employees are NOT protected by attorney-client privilege. Prosecutors love to flip co-defendants and get them to testify about conversations.

Plus, discussing the case with others can be viewed as obstruction—trying to coordinate stories or influence witnesses.

Only discuss the case with you’re attorney in private.

5. Understand the Cooperation Decision

At some point, prosecutors may offer you the opportunity to cooperate. This is a complex strategic decision that requires careful analysis with you’re attorney.

What cooperation means:

• Providing information about others’ criminal conduct
• Potentially testifying against co-defendants or others
• Complete honesty (lying during cooperation = new charges)
• Usually requires pleading guilty

Benefits:

• Substantial assistance departure under § 5K1.1 can reduce sentence by 50% or more
• Sometimes can avoid prison entirely with cooperation
• First to cooperate usually gets best deal

Risks:

• Must testify against colleagues, friends, possibly family
• If you lie or withhold information, deal is off and you face additional charges
• Cooperation doesn’t guarantee specific sentence reduction
• You’re cooperation may not be deemed “substantial” enough to get benefit

Never make the cooperation decision hastily. This requires deep analysis of the evidence, you’re exposure, and whether you actually have valuable information to provide.

6. Consider the Wells Notice Response Carefully

If you receive an SEC Wells Notice—notification that staff intends to recommend enforcement action—you typically have 30 days to submit a Wells response explaining why charges shouldn’t be filed.

This is a critical strategic decision. A well-crafted Wells submission can sometimes convince the SEC not to file charges. But it also shows prosecutors you’re defense strategy, which can help them prepare the criminal case.

Only submit a Wells response after careful consideration with both civil and criminal defense counsel.

Defense Strategies That Actually Work

If your facing securities fraud charges, your not without options. Here are the main defense strategies that succeed in these cases.

Challenging Intent/Scienter

This is the most common and often most successful defense. If prosecutors can’t prove you knew the information was false or acted recklessly, the case should fail.

Evidence supporting this defense:

• Documentation showing you asked questions and sought guidance
• Reliance on advice from attorneys, accountants, or other professionals
• Good faith belief in accuracy of statements (supported by contemporaneous documents)
• Lack of motive (you didn’t personally benefit)
• Evidence information was concealed from you by others

Challenging Materiality

If the alleged misstatements weren’t material—wouldn’t have mattered to a reasonable investor—then there’s no securities fraud even if the statements were false.

This defense works best with:

• Small dollar amounts relative to company size
• Non-financial disclosures
• Forward-looking statements with appropriate disclaimers
• Puffery and opinion statements

Statute of Limitations

Securities fraud has a 5-year statute of limitations under 18 U.S.C. § 3282. But be careful—the clock starts when the fraud was discovered, not when it was committed. And for continuing frauds (like Ponzi schemes), each new transaction can restart the clock.

If the alleged conduct is outside the limitations period and doesn’t qualify for an exception, this can be a complete defense.

Lack of Reliance/Causation

Particularly in private securities transactions, challenging whether investors actually relied on the alleged misstatements can work. If they:

• Conducted independent due diligence
• Had access to contrary information
• Made decisions based on other factors
• Were sophisticated investors

…then the reliance element may fail.

Good Faith/Advice of Counsel

If you relied on advice from lawyers or accountants in good faith, this negates the intent element. This defense requires:

• Full disclosure of facts to the professional
• Reasonable reliance on they’re advice
• Following that advice

You can’t selectively follow advice or doctor the facts you provide and then claim reliance.

Frequently Asked Questions

Can I go to jail for securities fraud even if I didn’t intend to defraud anyone?

Generally no. Intent (scienter) is a required element that prosecutors must prove beyond a reasonable doubt. If you genuinely didn’t know information was false and weren’t reckless in ignoring red flags, you have a strong defense. However, “reckless disregard for truth” can satisfy the intent requirement even without specific intent to defraud.

What’s the difference between securities fraud and wire fraud?

Securities fraud specifically involves deception in connection with buying or selling securities. Wire fraud is broader—any fraud scheme using interstate wire communications (email, phone, internet). The same conduct can violate both statutes. Securities fraud requires the securities connection; wire fraud doesn’t.

How long does a securities fraud investigation take?

SEC investigations typically take 18-36 months, though complex cases can run 4-5 years. Criminal investigations often run parallel and take similar timeframes. From initial investigation to final sentencing can easily be 3-5 years total.

Should I cooperate with investigators?

This is a complex strategic decision requiring experienced counsel’s advice. Cooperation can significantly reduce sentences (potentially 50%+) but requires providing substantial assistance, potentially including testifying against others. You cannot partially cooperate—its all or nothing. Never make this decision without experienced defense counsel.

What if I was just following orders from my boss?

“Following orders” generally isn’t a complete defense, but it can be relevent to the intent element. If you genuinely didn’t know the conduct was fraudulent and had no reason to suspect it, this may negate scienter. But if you had red flags and ignored them, this defense likely won’t work.

Can the SEC freeze my assets before I’m convicted?

Yes. The SEC can obtain emergency asset freezes and temporary restraining orders in civil cases based on a showing of likelihood of success—even before any admission or finding of liability. This can happen very early in an investigation, sometimes catching defendants completely by suprise.

What’s a Wells Notice and what should I do?

A Wells Notice is the SEC’s notification that staff intends to recommend enforcement action against you. You typically have 30 days to submit a Wells response (written submission explaining why charges shouldn’t be filed). This requires careful strategic consideration with counsel—it can help, but it also reveals you’re defense strategy.

Will settling the SEC civil case make the criminal case go away?

No. Civil settlement with the SEC doesn’t prevent DOJ criminal prosecution. In fact, admissions or stipulated facts in a civil settlement can be used against you in the criminal case. Civil and criminal cases must be handled strategically in coordination with seperate counsel.

How much will it cost to defend a securities fraud case?

Legal fees for securities fraud defense typically range from $500,000 to $5 million+ depending on case complexity, whether it goes to trial, number of charges, and whether your defending parallel civil and criminal cases. D&O insurance may cover some costs, but coverage is often disputed and may exclude intentional fraud. Early consultation with counsel about funding strategy is critical.

What if my company’s D&O insurance won’t cover my defense?

D&O policies often exclude coverage for intentional fraud or personal profit. If you’re policy won’t cover you, options include: (1) negotiating with the company for advancement of legal fees, (2) seeking separate coverage under employment agreements, (3) personal funds, (4) payment plans with counsel, or (5) in extreme cases, court-appointed counsel for criminal charges if you qualify as indigent. Don’t wait until the insurance dispute is resolved to hire counsel—time is critical.

Conclusion: Knowledge Is Your First Defense

If your facing a securities fraud investigation or charges, your probly terrified. That’s completely understandable. But understanding exactly what securities fraud is—and isn’t—is the first step toward defending yourself effectively.

Remember these critical points:

• Intent matters. Securities fraud requires proof you knew information was false or acted recklessly. Honest mistakes and good faith errors aren’t fraud.
• Materiality is a threshold. Not every misstatement qualifies. The information must be significant enough that reasonable investors would care.
• Don’t talk without counsel. The single biggest mistake is trying to “explain your side” to investigators without an attorney present.
• Time is critical. Evidence must be preserved, strategic decisions must be made early, and cooperation value decreases over time.
• Defenses exist and succeed. Many securities fraud cases result in acquittals, dismissed charges, or significantly reduced charges through effective defense.

Securities fraud investigations and prosecutions are among the most complex legal matters you can face. The stakes are enormous—your freedom, your career, you’re reputation, you’re financial future. But with experienced counsel and a clear understanding of the law, these cases can be defended successfully.

If your under investigation or have been charged, don’t wait. Contact an experienced securities fraud defense attorney today. Your next steps will determine the rest of your life.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. It does not create an attorney-client relationship. Securities fraud law is complex and fact-specific. If you’re facing an investigation or charges, consult with qualified legal counsel about you’re specific situation immediately.

Citations

1. 18 U.S.C. § 1348 – Securities and Commodities Fraud; SEC Rule 10b-5, 17 C.F.R. § 240.10b-5
2. SEC v. Zandford, 535 U.S. 813 (2002) – Defining “in connection with” requirement
3. Basic Inc. v. Levinson, 485 U.S. 224 (1988) – Materiality standard
4. Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) – Fraud-on-the-market theory
5. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) – Loss causation requirement
6. Dirks v. SEC, 463 U.S. 646 (1983) – Classical theory of insider trading
7. United States v. O’Hagan, 521 U.S. 642 (1997) – Misappropriation theory
8. SEC Investor Alert: Social Media and Investing – Stock Rumors (2023)
9. SEC v. Brady, 238 F. Supp. 2d 269 (S.D.N.Y. 2002) – Adverse inference from Fifth Amendment assertion
10. U.S. Sentencing Guidelines Manual § 2B1.1 (2023) – Fraud sentencing calculations