Securities Fraud – the Texas Criminal Offense

Texas Criminal Law

Under the Texas Securities Fraud law, it a crime to engage in fraud during the course of selling, purchasing, or inviting people to sell or purchase securities. Securities Fraud is a felony punishable by prison time. 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 Securities Act is the state law regulating the securities industry in Texas. Regulations on the securities industry can be found in Title 19 of the Texas Civil Statutes. Title 19 is called the “Blue Sky Law.” The Texas offense of Securities Fraud is described in Article 581-29(C) of the Blue Sky Law.

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.

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Although the crime of Securities Fraud itself sounds straightforward, a case of Securities Fraud involves several complicated issues that can take years to resolve.

What are securities?

The term “security” or “securities” is defined in Article 581-4(A) of the Texas Civil Code. The definition is in the “Definitions” section of the laws regarding Securities:

The term “security” or “securities” shall include any limited partner interest in a limited partnership, share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not.

However, Article 581-4(A) of the Texas Civil Code also states that insurance and endowment policies, annuity or optional annuity contract, or any contract or a agreement related to those things are not considered “securities”.[1] The typical “securities” involved in Securities Fraud are stocks.

Under Texas law, the term “security” or “securities” does not have to be used in a transaction for the transaction to involve securities.[2] If the item being transferred fits the the definition of a security, then the securities regulations apply to the transaction.

Where can the offense of Securities Fraud be found?

The Texas Civil Code contains a section that describes the offense of Securities Fraud in Article 581-29(C) when person does:

C. In connection with the sale, offering for sale or delivery of, the purchase, offer to purchase, invitation of offers to purchase, invitations of offers to sell, or dealing in any other manner in any security or securities, whether or not the transaction or security is exempt under Section 5 or 6 of this Act, or in connection with the rendering of services as an investment adviser or an investment adviser representative, directly or indirectly:

(1) engage in any fraud or fraudulent practice;

(2) employ any device, scheme, or artifice to defraud;

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

(4) engage in any act, practice or course of business which operates or will operate as a fraud or deceit upon any person

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.

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 punishment for the 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.[3] If the amount of money involved is between $10,000 and $100,000, the offense is punishable as a second degree felony.[4] If the amount involved is more than $100,000, the offense is punishable as a first degree felony.[5]

Legal References:

^1. Texas Civic Code Article 581-4(A) – “Provided, however, that this definition shall not apply to any insurance policy, endowment policy, annuity contract, 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 duly filed with the Department as now or hereafter required by law.”

^2. Texas Civic Code Article 581-4(A) – “The term applies regardless of whether the “security” or “securities” are evidenced by a written instrument.”

^3. Texas Civic Code Article 581-29(C)(4)(a)

^4. Texas Civic Code Article 581-29(C)(4)(b)

^5. Texas Civic Code Article 581-29(C)(4)(c)

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