Criminal Penalties
Up to this point, all the enforcement tools we've covered are administrative or civil in nature. Criminal penalties represent the most severe consequence for securities violations; they involve a different set of rules about who can do what.
Penalties for Willful Violations (Uniform Securities Act Section 409)
Any person who willfully violates any provision of the Uniform Securities Act (USA) (except Section 404) or any rule or order under the Act may face:
- A fine of not more than $5,000, OR
- Imprisonment of not more than 3 years, OR
- Both
Section 404 (misleading filings) has a higher mental state requirement: the person must know the statement was false or misleading in a material respect.
Memory Aid: The 5-5-3 rule: 5-year statute of limitations, $5,000 maximum fine, 3-year maximum prison term.
| Violation Type | Mental State Required | Maximum Fine | Maximum Prison |
|---|---|---|---|
| Any provision of the Act (except 404) | Willful (intentional act) | $5,000 | 3 years |
| Section 404 (misleading filings) | Knowledge that statement was false/misleading | $5,000 | 3 years |
| Violation of a rule or order (no knowledge) | Willful, but no knowledge of the rule/order | $5,000 | No imprisonment |
The No-Knowledge Defense
A person may not be imprisoned for violating a rule or order if they prove they had no knowledge of the rule or order.
Key distinctions:
- The no-knowledge defense only protects against imprisonment, not fines
- It applies to violations of rules or orders, not provisions of the Act itself
- If someone violates a provision of the Act, the no-knowledge defense does not apply; willfulness is sufficient
Exam Tip: Gotchas
- No-knowledge defense only blocks imprisonment, not fines. If someone violates a rule they didn't know existed, they can be fined but not imprisoned. But if they violate a provision of the Act itself (not just a rule), the "no knowledge" defense does not apply; willfulness alone is enough for both fines and imprisonment.
Criminal Referrals (USA Section 409(b))
The Administrator plays an important but limited role in criminal prosecutions:
- The Administrator may refer evidence of violations to the attorney general or district attorney
- The attorney general or district attorney may institute criminal proceedings with or without a referral from the Administrator
- The Administrator cannot bring criminal prosecutions directly
The Administrator gathers the evidence, but the legal system handles the prosecution.
Exam Tip: Gotchas
- The Administrator refers; the attorney general prosecutes. The administrator cannot bring criminal charges directly. Also, criminal proceedings can be initiated by the attorney general or district attorney even without a referral from the Administrator.
Statute of Limitations
Criminal proceedings under the Act must be brought within 5 years of the alleged violation (this is an optional provision that varies by state).
No Limitation on Other Criminal Laws
Section 409(c): Nothing in the Act limits the state's power to punish any person for conduct that constitutes a crime under other statutes or at common law. Securities fraud may also constitute wire fraud, theft, or other crimes that carry their own penalties.