Fraud is a commonly prosecuted federal crime in the United States and securities fraud charges have made news headlines in the prosecution of Bernie Madoff.
18 U.S.C. § 1348 provides stringent criminal penalties for the federal crime of securities and commodities fraud. Broadly speaking, a “security” is a financial instrument in which individuals or entities invest and hope to earn returns.
Commodities are goods which are traded on the open market, such as gold, oil, wheat, etc. Investors often buy and sell “options,” or “futures,” on commodities which are contracts which allow the investor to either buy or sell a commodity at a certain price in the future. The buying and selling or securities and commodities contracts is critical to the United States economy and to global financial markets.
Securities fraud, commonly known as investment fraud or stock fraud, is the unlawful practice of using manipulative or deceptive tactics to purchase or sell a security.
Under federal securities fraud law, a “security” is a variety of investments that includes contracts, bank notes, municipal bonds, among others. If you participate within a security and are accused of lying or cheating with intent to gain a financial advantage, you could face 18 U.S.C. § 1348 federal securities fraud charges. Common types of securities fraud include insider trading, accounting fraud, churning, and misrepresentation.
Federal securities fraud charges can be filed against anyone who intentionally convinces investors to sell or purchase a security on the basis of false or misleading information, or against anyone using insider information to make a decision to sell or purchase a security for their own profit.
Securities fraud also includes unlawful acts of theft from investors, embezzlement, abusive short selling, Ponzi schemes, pump-and-dump schemes, or making false statements to corporate auditors.
Definition of Federal Securities Fraud 18 U.S.C. § 1348
It's a federal crime to defraud anyone in connection with a security or commodity - or obtain money or property from purchasing or selling a security - by using false or fraudulent pretenses, representations, or promises.
The federal securities fraud law contains language that makes it a crime to knowingly execute, or attempt to execute, a scheme or artifice to defraud someone in connection with any commodity for future delivery, or any security under the Securities Exchange Act of 1934.
It should be noted that under 18 U.S.C. § 1348, you can be convicted of federal securities fraud even if you never made a profit from the fraudulent activity. In other words, simply engaging in fraudulent activity with intent to profit or benefit is sufficient for the crime of federal securities fraud.
Unfortunately, because of the complex nature of the securities and commodities market, the day-to-day operation of which is often opaque to the average citizen, there are ample opportunities for fraudulent conduct which seeks to take advantage of investors' trust or naivety.
Categories of Behavior Related to Securities Fraud
18 U.S.C. § 1348 criminalizes two categories of behavior related to securities and commodities trading when the defendant executes, or attempts to execute a scheme knowingly.
First, Section 1348 criminalizes defrauding any person in connection with a commodities transaction, an options transaction, or a securities transaction. Second, Section 1348 criminalizes the obtaining of any money via false or fraudulent pretenses, representations, or promises in connection with a commodity or securities transaction.
It should be noted that ordinary sales of goods contracts - buying groceries at the market, purchasing consumer goods online for delivery, etc. - are not encompassed within the scope of 18 U.S.C. § 1348.
This section specifically criminalizes only fraud in the context of the buying and selling of financial instruments, whether they be securities, or futures or options contracts for commodifies. The two categories of criminal conduct punishable under 18 U.S.C. § 1348 are related, but distinct.
Example of Federal Securities Fraud
The following hypothetical will illustrate the difference. Suppose the defendant purports to offer futures contracts for valuable gems for sale on the commodities market.
He offers a substantially lower-than-market price for the gem futures, which attracts the attention of the victim, a buyer. In fact, the defendant has no connection to the gem market and no intention of making good on the futures contracts as agreed, but hopes the victim will provide payment before he discovers the fraud.
Unfortunately for the defendant, the victim is tipped off about the defendant's intentions and refuses to provide payment, instead reporting the defendant to the relevant regulatory agency within the federal government. The defendant is guilty of attempting to defraud the victim in connection with the commodity futures contract even though no money changed hands.
In the same scenario, had the victim actually tendered payment on the futures contract before discovering that he had been defrauded, the defendant would additionally be guilty of obtaining money by false pretenses under Section 1348.
Penalties for 18 U.S.C. § 1348 Securities Fraud
Securities and commodities fraud is a serious crime under federal law, punishable by a maximum imprisonment of 25 years, plus a fine. 18 U.S.C. § 1349 confirms that an attempt or conspiracy to commit a violation of 18 U.S.C. § 1348 will be punished in the same manner as a violation of Section 1348 itself.
The actual sentence imposed in a given case will vary dramatically based on the application of the United States Sentencing Guidelines, the equitable factors contained in Title 18 of the United States Code, Section 3553(a), as weighed by the trial judge's substantial sentencing discretion.
In a financial crime, such as a violation of Section 1348 or Section 1349, the calculation of the loss amount will substantially impact the eventual sentence imposed in almost every case.
The Sentencing Guidelines define loss as intended, rather than actual, loss, though some courts have expressed skepticism about the fairness of this approach particularly in cases with little or no actual loss and where the defendant was a minor participant in the fraud scheme.
Defending Federal Securities Fraud Charges
If you or a family member is under investigation for or has already been charged with securities and commodities fraud in violation of 18 U.S.C. § 1348 or 1349, contact our experienced federal criminal defense attorneys for an initial consultation.
Whether it was committed by insider trading, misrepresentation or fraudulent accounting, securities fraud is a white-collar crime – meaning a nonviolent, financially motivated crime. Fraud crimes are normally aggressively prosecuted by the federal government and the consequences of a conviction can be severe. However, the federal prosecutor has the burden of proof to show you committed securities fraud beyond a reasonable doubt.
We might be able to argue you had no knowledge of the securities rules or regulations, you had an honest and good faith belief your statements were true, or the evidence against you was obtained during and illegal search and seizure.
We can guide you through the federal investigative and court process and advise you on the immediate steps to take to secure your rights and begin working toward the best possible outcome based on the particular facts of your case. Effective advocacy, even before court, is crucial to eventually securing the best outcome.
Eisner Gorin LLP is a top-ranked criminal defense law firm located at 1875 Century Park E #705, Los Angeles, CA 90067. Call our office for a consultation at (310) 328-3776.