Criminal Penalties

Now that you understand the civil side (private lawsuits between buyers and sellers), let's move to criminal enforcement under Section 409, where the state pursues violators through the criminal justice system.

Penalties for Willful Violations (Section 409(a))

Under the Uniform Securities Act (USA), any person who willfully violates any provision (except Section 404) or any rule or order may face:

  • Mental state required: Willful (intentional act, not necessarily intent to violate the law)
  • Maximum fine: $5,000 per violation
  • Maximum imprisonment: 3 years per violation
  • Combined: Fine, imprisonment, or both

These penalties apply per violation. A person found guilty of three violations could face up to $15,000 in fines and 9 years of imprisonment.

Section 404 violations (misleading filings) require an additional element: the person must have known the statement was false or misleading in a material respect.

Defense to imprisonment: A person cannot be imprisoned for violating a rule or order if they prove they had no knowledge of that rule or order.

Think of it this way: If you drive 70 in a 55 zone, you "willfully" drove 70, even if you did not see the speed limit sign. You can still get fined. But if the speed limit changed yesterday and the sign was never posted, a court might not send you to jail for it.

Exam Tip: Gotchas

  • "Willful" means the person intentionally committed the act, not that they intended to break the law. A broker-dealer who intentionally sells unregistered securities acts "willfully" even if they did not know registration was required. But they cannot be imprisoned for violating a rule they did not know existed. The distinction between "willful act" and "no knowledge of the rule" is frequently tested.

Criminal Referrals (Section 409(b))

The Administrator plays a limited but important role in criminal enforcement:

  • 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

Exam Tip: Gotchas

  • The Administrator can investigate and refer, but cannot prosecute. Only the attorney general or district attorney can bring criminal charges. This is a common exam distinction; the Administrator's enforcement power is administrative (cease and desist, denial of registration), not criminal.

Preservation of Other Criminal Laws (Section 409(c))

  • Nothing in the USA limits the power of the state to punish any person for conduct that constitutes a crime under other statutes or at common law
  • Securities fraud may be prosecuted under both the USA and general criminal fraud statutes
  • This means violators can face criminal charges from multiple sources

Statute of Limitations for Criminal Actions

  • Criminal proceedings must generally be brought within 5 years of the alleged violation

  • This is an optional provision that varies by state

  • Civil (Section 410): 3 years from sale or 2 years from discovery (whichever is shorter)

  • Criminal (Section 409): 5 years from the violation

Exam Tip: Gotchas

  • Criminal actions get a longer statute of limitations (5 years) than civil actions. Civil suits must be filed within 2 years of discovery or 3 years of the sale. If the exam asks which deadline is longer, criminal wins.