September 6, 2022

Securities Fraud: Not Just for Wall Street Traders

The term securities fraud may bring to mind a certain type of conduct that happens in Wall Street banks and investment firms, far from the day-to-day work of entrepreneurs and small businesses in the big cities and small towns of California. Unfortunately, many people who are engaged in what they consider the regular work of owning and operating businesses that seem to have nothing to do with matters such as the initial public offerings or derivative swaps which make up the world of major financial centers can find themselves the subject of state and federal investigations into securities fraud. 

Such investigations – which may be pursued by the Securities and Exchange Commission (SEC), the Market Integrity and Major Fraud Unit of the Department of Justice, or the Securities Unit of the Corporate Fraud Section of the California Attorney General’s Office, or the Financial Industry Regulatory Authority (FINRA), among others – can involve severe civil and sometimes criminal penalties for those involved. 

Individuals and entities who find themselves the subjects of a securities fraud investigation – which of course might include traders and investment bankers, but also entrepreneurs, promoters, and sales persons who may not have considered themselves to be in the “securities” business at all – are encouraged to work with experienced white collar defense counsel at the earliest sign of an enforcement action or investigation.  

What Are Securities?

Most people understand that the type of stock that is traded on a major stock exchange such as the NYSE is a security. But in addition to stocks, other financial instruments such as bonds generally qualify as a security. 

Moving beyond such traditional investment instruments, however, knowing what is and is not a security is not always crystal clear. For example, some types of cryptocurrency might be considered a security by relevant government authorities, while others may not. With respect to businesses which may not have publicly traded stocks on a major stock exchange, certain types of investments related to the business such as a promissory note or a limited partnership interest might also be considered a security.

Why is this important? Because if a financial interest is indeed a security, there are numerous state and federal regulations that obligate those offering such securities must comply with, and certain penalties for behavior which might otherwise not be objectionable (such as disclosing certain information related to the business – or not disclosing certain information – without complying with specific requirements) which can land a person in trouble with securities regulators, again even where the investigation target in question may not have considered themselves to be in the business of securities. 

Types of Securities Fraud

Commonly investigated types of securities fraud include the following, among others: 

  • Selling unregistered or unqualified securities. Although not every security is required to be registered with relevant state and federal authorities, selling unregistered securities to investors who do not qualify to purchase such securities (e.g., persons who are considered accredited investors) may be considered securities fraud. 
  • Insider trading. Certain persons who have knowledge of the interior workings of a publicly-traded business that is not public knowledge may be liable for insider trading, and even those persons who learn of such “inside knowledge” through improper sources may be liable as well. 
  • Improper disclosures and failure to disclose. Those entities offering securities, whether as an issuer of the security (e.g. a business issuing ownership shares in the business), or those entities participating in the sale of securities may face securities fraud liability for making inaccurate disclosures, or even in failing to disclose certain information relevant to the business. As an extreme example, a company that attracts stock investors by indicating that it has several operating factories in Mexico, when no such business operations exist, would likely face exposure for securities fraud. 
  • Market manipulation. Traders and company insiders who attempt to improperly manipulate markets to benefit themselves, such as spreading untrue rumors to devalue a company’s stock or engaging in a “pump and dump” scheme to artificially inflate a stock’s price before selling it in the improperly inflated market are frequent subjects of securities fraud investigation. 


Penalties for securities fraud include state and federal civil penalties such as steep fines and disgorgement of ill-gotten gains. Additionally, an individual or entity may be banned from participating in certain financial activities for a period of time and may face severe reputational risk within the financial industry and/or their specific industry. Finally, in some cases white collar securities fraud defendants can face jail and prison time.

Seeking A White Collar Defense Attorney

If you believe you may be subject to a securities fraud investigation or other adverse action, or are concerned about future exposure whether related to your own conduct or the conduct of those with whom you are in business, it is important to employ skilled legal counsel to address these concerns. 

The time to seek experienced counsel from a skilled white collar defense attorney is at the first signs of a potential government investigation, enforcement action or prosecution. Often, the first steps in responding to a potential government proceeding are the most critical in setting the course for an ultimate outcome that defends one’s interests, reputation, and, in some cases, freedom. Contact our office to speak with an experienced white collar defense attorney regarding your situation today.

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