CALIFORNIA SECURITY FRAUD LAWS

security fraud in california

Security Fraud refers to a wide range of illegal activities, including investors’ deception and financial markets’ manipulation. Scammers represent a new venture as a very profitable money-maker, however, you always put your investment under risk.

Nowadays, the economy is more complex. Numerous players in the stock market makes harder to understand where the truth is. And people often become a victim of fraudsters. Financial crimes and fraud obtain various forms. Taking into consideration this fact, nobody is guaranteed to avoid being involved into false financial projects.

Below, The Margarian Law Firm will introduce you the main elements of the California Security Fraud. Moreover, in the resources of our site you can find detailed information about different kind of financial crimes and fraud in California.

1. Legal Definition of the Security Fraud in California
2. Common types of California Fraud
a) Security Fraud by the Company Itself
b) Insider Trading
c) Third Party Misrepresentation
3. Punishment of Security Fraud
a) California Security Laws
b) Federal Security Laws
c) Civil suits for Securities Fraud in California
4. Legal Defenses to California Fraud Accusations
5. Related Articles

In addition, we are ready to provide answers to your initial questions concerning fraud charges in California for free.

You may file your request online, by telephone or by mail. 818-553-1000

1. What Does Security Fraud in California mean?

Security fraud is defined as an act which occurs when someone makes a false statement about a company or the value of its stock, in consequence, other people take financial decisions based on this false information.
The term “Security” is defined under California Corporations Code Section 25019, it means
– any note;
– stock;
– treasury stock;
– membership in an incorporated or unincorporated association;
– bond;
– debenture;
– evidence of indebtedness;
– certificate of interest or participation in any profit-sharing agreement;
– transferable share;
– investment contract;
– etc.

It has to be noted that there is no particular instrument within the meaning of the statute which allows to consider an act as security fraud. The question has to be determined in each case separately. In arriving at a determination the courts have been mindful that the general purpose of the law is to protect the public against the imposition of unsubstantial, unlawful and fraudulent stock and investment schemes and the securities.[1]

2. Which are common schemes of Securities Fraud?

Below we represent some common types of Security Fraud which can occur in practice.

a) Security Fraud by the Company Itself
This kind of fraud occurs when a director or an officer of a firm report false financial information, or not properly, to the shareholders.
It artificially raises the worth of stock of the company. Consequently, the investors start buying the shares of an unhealthy company. Generally, such companies go bankrupt and investors lose their money. One of the most famous examples of the security fraud by the company officers that the Enron scandal while the corporation failed to report the true expenses and profits seemed to be larger.
b) Insider Trading
Another type of security fraud is insider trading. It occurs when someone inside the company is aware of any confidential information about financial situation of the company and this person uses the information in his or her own interests to buy or sell the stock. For example: one of the directors can notice the upcoming insolvency of the company and sell his shares. If he accomplishes it before notifying the board, he may be guilty of insider trading.
c) Third Party Misrepresentation
This type of securities fraud is also known as “pump and dump”. In this scheme, the perpetrator buys large amounts of share of small and unknown company. Then he spreads false information about the company to encourage the others to buy the shares. One the price of the stock is rising, the offender starts selling his shares and gets a profit.

3. Punishment of Fraud

Securities Fraud crimes are considered to be “wobblers”, that is to say the defendant can be charged whether with a misdemeanor or a felony. The charge depends on:
– specific circumstances of the case
– criminal history of the offender.

a) Security Fraud’s Penalties in California
If you are prosecuted for securities fraud in California, you can face an imprisonment, a fine, or both.
Any person who willfully violates California security laws, shall upon conviction be:
– fined up to one million dollars ($1,000,000),
– or imprisoned in a county jail or state prison up to three (3) years
– or be punished by both that fine and imprisonment.

Any person who willfully makes a false representation of securities, or engages in trading inside shall upon conviction be:
– fined up to ten million dollars ($10,000,000),
– or imprisoned in state prison or county jail for two (2), three (3) or five (5) years, – or be punished by both that fine and imprisonment.

Any issuer, as defined of the Sarbanes-Oxley Act of 2002 (Public Law 107-204), who willfully violates California Security Laws shall upon conviction be fined not more than twenty-five million dollars ($25,000,000), or imprisoned for two (2), three (3), or five years (5), or be punished by both that fine and imprisonment.
Sarbanes-Oxley Act of 2002 defines an issuer company as:
– Has the securities of which are registered under section 12 of that Act (15 U.S.C. 78l),
– or that is required to file reports under section 15(d) (15 U.S.C. 78o(d)),
– or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.[2]

b) Which are federal penalties for Securities Fraud?
Security fraud is not only a crime in California, but it is a federal crime as well. The defendant may face both charges: state and federal.
Mainly, federal securities fraud are investigated by Securities and Exchange Commission, then if the charges are filed, the federal Department of Justice will pursue investigation and prosecutions of insider trading.

Convicted of federal securities fraud can face the following penalties:
– A fine up to $5,000,000,
– or imprisonment not more than 20 years,
– or both.

There is one exception from this rule: when such person is a person other than a natural person, a fine imposed must not exceed $25,000,000.

We see that federal penalties for Securities Fraud are even harsher than California charges; it will be useful to find an attorney in order to protect the defendant’s rights as soon as possible.

c) Are there civil suits for securities fraud?

It can occur that a convicted of securities fraud must defend from civil lawsuits by people who pretend to be harmed by his or her behavior. If the court recognizes those people rights’, you can be obliged to pay damages which can ever exceed criminal fines. Any person who violates California Security Laws can be liable for a civil penalty not to exceed twenty-five thousand dollars ($25,000) for each violation. It must be assessed and recovered in a civil action brought in the name of the people of the State of California by the commissioner in any court of competent jurisdiction.[3]

4. Legal Defenses to California Fraud Accusations

California Corporate Code allows to convict the defendant of breaking Security Laws under the following condition: “no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order”. Thus, you cannot be convicted unless acted “wilfully”.
Your California defense attorney can use legal defenses in order to reduce or dismiss your charge. Below, we represent some of them.

False accusations

Plea bargain and dismissals

– Etc.
5. Related Articles

Fraud Offense

California Theft Crimes

Identity Theft

Dealer Fraud

Insurance Fraud

Mail Fraud

Credit Fraud

Telemarketing Fraud

Wire Fraud

Tax Evasion

Mortgage Fraud

California Theft Crimes

If you have faced accusations of Securities Fraud, it is essential to contact an experienced and professional California defense attorney who is will provide legal assistance. The Margarian Law Firm aggressively protects the rights of criminal defendants in California. Each defense will be developed upon the facts of your individual case. Do not hesitate to contact us!

You may file your request online, by telephone or by mail. 818-553-1000

[1] People v. Figueroa
[2] Section 2 of the Sarbanes-Oxley Act of 2002 (Public Law 107-204)
[3] California Corporation Code Section 25535

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