Securities Fraud: Texas Government Code §4007.203

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Under the Texas Securities Fraud law, it a felony offense to engage in fraud during the course of selling, purchasing, or inviting people to sell or purchase securities.

A typical case of Securities Fraud involves a person that lies about a company in order to convince another person to buy shares of stock in that company. Another typical examples involves a person who lies about the value of a company’s stocks.

The Texas legislature codified this criminal offense in Texas Penal Code Section 4007.203. The law was not amended in 2023. The legislature most recently amended the law in 2019, when it passed the Texas Securities Act to replace the Vernon’s Civil Statutes, which expired in 2022. The new Texas Securities Act took effect the day that Vernon’s expired, January 1, 2022.

The Texas State Securities Board accepts complaints about the offers and sales of securities. If the Board suspects a criminal violation like Securities Fraud, the Board will refer the case to a Texas District Attorney or a United States Attorney for prosecution. The State Securities Board consists of five members who create and update the Board Rules of the Texas Securities Act.

The Government Code classifies the Texas Securities Fraud law under Title 12 “Securities Act,” Chapter 4007 “Enforcement.” Learn more about the Texas offense of Securities Fraud below.

What is the current Texas law about Securities Fraud?

Texas law currently defines the offense of Securities Fraud in Government Code Section §4007.203 as follows:^[1]

(a) A person commits an offense if:

(1) the person directly or indirectly:

(A) engages in any fraud or fraudulent practice;

(B) employs any device, scheme, or artifice to defraud;

(C) knowingly makes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; or

(D) engages in any act, practice, or course of business that operates or will operate as a fraud or deceit on any person; and

(2) the applicable conduct is committed in connection with:

(A) the sale of, the offering for sale or delivery of, the purchase of, the offer to purchase, invitation of offers to purchase, invitations of offers to sell, or dealing in any other manner in any security, regardless of whether the transaction or security is exempt under Chapter 4005; or

(B) the rendering of services as an investment adviser or an investment adviser representative.

The current Securities Fraud law was enacted in 2019, effective January 1, 2022, when the legislature passed the new Securities Act to replace the one that expired on January 1, 2022.

What are securities?

The term “security” is defined to include any of the following, whether the security is evidenced by a written instrument or not:^[2]

(A) a limited partner interest in a limited partnership;

(B) a share;

(C) a stock;

(D) a treasury stock;

(E) a stock certificate under a voting trust agreement;

(F) a collateral trust certificate;

(G) an equipment trust certificate;

(H) a preorganization certificate or receipt;

(I) a subscription or reorganization certificate;

(J) a note, bond, debenture, mortgage certificate, or other evidence of indebtedness;

(K) any form of commercial paper;

(L) a certificate in or under a profit sharing or participation agreement;

(M) a certificate or instrument representing an interest in or under an oil, gas, or mining lease, fee, or title;

(N) a certificate or instrument representing or secured by an interest in any of the capital, property, assets, profits, or earnings of a company;

(O) an investment contract; and

(P) any other instrument commonly known as a security, regardless of whether the instrument is similar to another instrument listed in this subsection

However, the law provides that “an insurance policy, endowment policy, annuity contract, or optional annuity contract, or any contract or agreement in relation to and in consequence of any such policy or contract, issued by an insurance company subject to the supervision or control of the Texas Department of Insurance when the form of such policy or contract has been filed with the department as required by law” are not considered “securities”.^[3]

Prior to 2022, “securities” were defined in Section 4 of the Securities Act.^[4]

Where can the offense of Securities Fraud be found?

The Texas Securities Fraud law is found in the Government Code at Section 4007.203.^[5] However, this is only one of the criminal offenses defined in Texas law related to the purchase and sale of securities.

All sales of securities are covered by this Texas statute, regardless of whether they are registered, exempt or otherwise. Fraud, lies, or misleading statements made during the sale, purchase, offer, or invitation of securities is a crime under this state law.

The new Texas Securities Fraud law took effect on January 1, 2022.^[6] That is the same day that the old Blue Sky laws regulating securities, called the “Securites Act” under Title 19 of the Vernon’s Civil Statutes, expired.^[7]

The old Texas Vernon’s Civil Code defined the offense of Securities Fraud in Article 581-29(C) in Title 19 of the Civil Statutes.^[8]

How does the state prove you committed Securities Fraud?

The way that the state will attempt to prove someone committed Securities Fraud depends on what type of Securities Fraud the state accuses someone of committing. There are three main types of Securities Fraud offenses: Securities Fraud by a company, “insider trading” and “third party misrepresentation.”

A company commits Securities Fraud when it misrepresents the company’s financial information, for example, by stating that the company’s stocks are worth more than they really are.

Insider trading refers to a person that uses or claims to have inside information about a company in order to convince someone to buy or sell stocks. Whether the information is true or not, insider trading is Securities Fraud.

“Third party misrepresentation” is a type of Securities Fraud that a person commits by misrepresenting information about a third party company in order to get people to invest in that company. Then, when the price is high enough, that person will sell their shares for profit.

Once the state’s attorneys have found something they think constitutes Securities Fraud, they will attempt to find evidence that you made certain misrepresentations and then essentially fit the misrepresentations into one of those categories of Securities Fraud.

What is the statute of limitation for Securities Fraud in Texas?

The limitation period for Securities Fraud is five years.^[9]

What is the penalty for a Texas Securities Fraud offense?

Securities Fraud is a felony charge, and the punishment severity increases with the amount of money involved. If the amount of money involved was less than $10,000, the offense is punishable as a third degree felony.^[10] If the amount of money involved is between $10,000 and $100,000, the offense is punishable as a second degree felony.^[11] If the amount involved is more than $100,000, the offense is punishable as a first degree felony.^[12]

Can you get probation for Securities Fraud in Texas?

The Texas Code of Criminal Procedure allows both judges and juries to grant probation for Securities Fraud, and judges are also allowed to accept deferred adjudication plea deals.^[13]

What level of crime is Securities Fraud in Texas?

The Government Code classification of the punishment for Securities Fraud ranges from a third degree felony to a first degree felony, depending on the amount of money involved.

Learn more about the penalty range for this offense in the section above.

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Legal References:

^1. Texas Government Code §4007.203. This law is current as of 2024.^2. Government Code §4001.068(a)^3. Government Code §4007.068(b)^4. Texas Securities Act, Section 4, codified at Art. 481-4 of Vernon’s Civil Statutes^5. Government Code §4007.203^6. See Government Code §4007.203, as enacted by HB 4171, 86th Legislature, Section 1.01^7. See Vernon’s Civil Statutes, Title 19^8. Article 581-29(C), Title 19, Vernon’s Civil Statutes^9. Government Code §4007.203(c)^10. Government Code §4007.203(b)(1)^11. Government Code §4007.203(b)(2)^12 Government Code §4007.203(b)(3)^13. See Chapter 42, Texas Code of Criminal Procedure, Art. 42A.054, Art. 42A.056, Art. 42A.102 .“}