Federal Investment Advisory Fraud Laws and Defenses
Investment fraud is described as the deliberate use of deception to persuade investors to make financial decisions based on false information.
Put simply, it's convincing others to invest money by using false information they knew didn't exist, or using the money in a manner that was not intended.
Investment fraud is also known as securities fraud or stock fraud and is a serious offense that carries up to 25 years in prison and large fines.
The state of California funds a Securities Unit that “protects investors, pension funds, and the general public through enforcement of California's Corporate Securities and Commodities laws.”
If you're facing a federal investment advisory fraud charge, you're dealing with an even greater animal, which is the federal government.
Your case may fall to the U.S. Department of Justice's Fraud Section, targeting white collar crime nationwide. Heading into formal case proceedings, you should be knowledgeable of relevant statutes, potential consequences, and other pertinent topics.
If you are the target of an investigation or are currently facing charges, you should immediately contact a federal criminal defense attorney to start preparing a strategy.
What Is Investment Advisory Fraud?
Investment advisory fraud, also known as financial advisor fraud, is alleged investment fraud carried out by a licensed financial advisor.
It refers to the illegal practice of inducing financial decisions from investors based on false information.
The Federal Bureau of Investigation (FBI) states that “Investment fraud involves the illegal sale or purported sale of financial instruments.”
The Bureau cites common hallmarks of investment fraud such as:
- Disingenuous offers of low-risk investment,
- Disingenuous offers of no-risk investment,
- Promises of guaranteed returns,
- Promises of overly consistent returns,
- Overly complex investing strategies (meant to deceive),
- Investment in unregistered securities.
The FBI's specific forms of investment fraud include Ponzi schemes, pyramid schemes, market manipulation fraud, and advance fee fraud.
What are the Different Types of Investment Fraud?
Common types of federal investment fraud are insider trading and stock manipulation, but there are a wide range of other crimes that fall under the umbrella of investment fraud, such as the following:
- Pyramid and ponzi schemes where there are promises to investors of large profits for recruitment of new investors;
- Pump and dump schemes where false information is spread regarding a stock to increase price and then a quick sell for profit;
- Insider trading where trades are made on a company stock based on information that is not publicly available;
- Churning is when a broker with control of investor's account makes excessive stock transactions to obtain commissions;
- Embezzlement and accounting fraud;
- Real estate and estate planning fraud;
- Telemarketing and timeshare fraud;
People who are involved in investment fraud are frequently committing other types of white collar federal crimes, such as identity theft, forgery, bribery, extortion, and falsifying business records.
What are the Relevant Federal Laws?
There is a wide range of federal legislation that regulates the investment industry and the Securities and Exchange Commission (SEC) is responsible for enforcing the securities law. These following acts are used by federal prosecutors in investment fraud cases:
- Securities Exchange Act of 1934;
- Trust Indenture Act of 1939;
- Investment Company Act of 1940;
- Securities Act of 1993;
- Sarbanes-Oxley Act of 2002;
- Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;
- Jumpstart Our Business Startups Act of 2012
There are many different sources that normally identify and report investment fraud, including federal regulatory agencies, whistleblowers, and investors.
Who Is Subject to Investment Advisory Fraud Charges?
Investment advisers are the party most likely to face investment advisory fraud charges. In some cases, a party posing as an investment advisor may face charges of investment advisory fraud.
Per the U.S. Securities and Exchange Commission (SEC), an investment advisor is a “person or firm that is engaged in the business of providing investment advice to others or issuing reports or analyses regarding securities, for compensation.”
According to the SEC, investment advisors can include:
- Money managers;
- General partners of hedge funds;
- Financial planners;
- Investment consultants;
- Others who receive compensation in exchange for “advice about securities.”
If you have received notice of criminal charges, then you are clearly subject to investment advisory fraud charges.
What Is the Legal Bar for a Financial Advisory Fraud Conviction?
The precedent-setting case of United States v. Tagliaferri established the standard for conviction of investment advisory fraud.
The finding established that a financial advisor must only intend to deceive their client in order to be convicted of financial advisory fraud. The defense unsuccessfully argued that the state must prove intent to harm the client to convict.
Sanctions for an Investment Advisory Fraud Conviction
The United States Sentencing Commission (USSC) explains that the average sentence for investment fraud in 2020 was 46 months. 86.6% of those sentenced spent time in prison.
Defendants may experience enhanced or reduced sentences based on:
- The number of victims affected by their alleged crimes;
- The level of sophistication that their offense entailed;
- The level of concealment attempted by the defendant;
- The licensing status of the accused (including their status as a licensed investment advisor);
- Whether the defendant obstructed or impeded justice.
Charges and possible sanctions can vary from case to case.
Examples of Investment Advisory Fraud Cases
Several real-world cases exemplify how investment advisory fraud cases may unfold. Those cases include:
- The sentencing in 2021 of a Massachusetts-based investment advisor accused of “defrauding his clients by stealing their funds and using them for various purposes, including to pay purported returns to other defrauded investors.”
- The conviction of a self-titled New Jersey hedge fund manager who “defrauded two small companies out of more than $4 million by posing as a hedge fund manager who could arrange project financing for them in exchange for an investment in one of his funds.”
In general, investment advisory fraud involves some form of deception, with the offender benefiting financially from the deceit.
What are the Penalties?
Investment fraud is normally prosecuted U.S.C. § 1348 by the Securities and Exchange Commission (SEC). If you are convicted, then you could be facing the following penalties:
- Five years in prison for each offense;
- Fines will be decided by circumstances and type of fraud, but normally range from $10,000 to much higher;
- Restitution will typically be ordered by the court due to the fact defendant's actions caused a monetary loss to a person or company;
- Probation could be ordered by the court if there was only a single act of fraud and not financial loss, which normally last 5 years and include specific conditions, such as payment of fines and restitution, and other conditions.
Readers should note that other related charges, such as obstruction of justice could increase the punishments for an investment fraud conviction.
Potential Defenses to an Investment Advisory Fraud Charge
The appropriate defense for an investment advisory fraud accusation will depend on your case facts. Potential defenses include:
- That you did not commit fraud as presented by the prosecution;
- That you were never deceptive in your interactions with clients;
- That your actions were not reckless or intentional;
- That evidence or testimony has been misrepresented;
- That investor did not rely on the information you provided;
- That you are innocent of investment advisory fraud for any other reason;
An investment fraud conviction requires actual proof you engaged in fraudulent conduct, and that an investor relied on fraudulent information you provided causing them to make a harmful financial decision.
Put simply, the federal prosecutor have several factors they must prove beyond a reasonable doubt in order to obtain a conviction. In other words, to get a conviction, the prosecution must establish each element of the crime.
Thus, a common defense strategy in investment fraud cases is to make a reasonable argument the federal prosecutor failed to prove one of more of the elements.
Perhaps our criminal defense lawyers can challenge the prosecution's evidence by submitting conflicting evidence.
The FBI notes that criminal investment fraud schemes “often seek to victimize affinity groups—such as groups with a common religion or ethnicity…”. To obtain a conviction, the federal government may need to prove that you intentionally deceived a client or group of clients.
While this is a high bar, do not underestimate the potential of your opponent.
The Central District Court of California may be the arbiter of your investment advisory fraud case. This court handled the fourth-most investment fraud cases of any court in the U.S. in 2020.
Eisner Gorin LLP is based in Los Angeles County, but represent clients throughout Southern California. Call 877-781-1570 for an initial consultation.