Assisting prosecutors in investment fraud cases

By Joe Rotunda
Director of the Enforcement Division, Texas State Securities Board in Austin

The Texas State Securities Board (SSB) has a successful and growing program of working with county and district attorneys to prosecute investment scams.

            The SSB employs 33 attorneys, examiners and other personnel assigned to offices in Austin, Corpus Christi, Dallas, and Lubbock. Enforcement personnel investigate illegal investment offerings and uncover admissible evidence, secure key testimony, and audit complex financial records. They pursue law enforcement actions to stop Ponzi schemes, retirement frauds, and other investment scams.

            Equally important, SSB enforcement personnel routinely assist district attorney’s offices in the prosecution of white-collar criminals. From 2017 through mid-2019, the SSB assisted local prosecutors in 12 counties to secure convictions of 19 criminals in 11 counties, resulting in prison sentences totaling 284 years, community supervision of 55 years, and orders of restitution totaling $7.6 million. In addition, 19 individuals were indicted in seven counties during that time period.[1]

Securities fraud cases
The SSB is responsible for administering the Securities Act,[2] a state law designed to protect Texas investors. The Securities Act authorizes the SSB to license persons who sell securities, issue permits for securities sold in Texas, and conduct on-site inspections of registered firms. The SSB is also a law enforcement agency that investigates illegal securities schemes and refers criminal cases to local district attorney’s offices. 

            The SSB’s law enforcement program often investigates classic fraudulent securities schemes, such as scams where a suspect falsely promises safe, secure returns through the purchase of worthless stocks, bonds, or promissory notes. The investigative authority is broad, though, and the statute authorizes the SSB to investigate many different types of passive investment opportunities. For example, the SSB recently investigated fraudulent schemes involving oil and gas drilling programs, real estate flipping deals, medical marijuana dispensaries, precious metals, industrial shipping containers, and Bitcoin and other cryptocurrencies. White-collar criminals are notoriously creative, but state law is flexible, designed to adapt to fraudsters’ new or evolving schemes.

            Although many white-collar criminal offenses are codified in the Texas Penal Code, the Securities Act codifies criminal offenses specifically relating to the offer and sale of securities. For example, the Securities Act provides third-degree felony punishment for a person who offers or sells securities without a license or who offers and sells unregistered securities.

            The statute also requires that all persons who offer or sell securities truthfully disclose all known material facts to potential investors. A promoter of a securities scheme who intentionally fails to disclose material facts to potential investors, such as prior felony convictions or key regulatory actions, or who knowingly misrepresents a relevant fact, such as the profitability of an investment program, commits securities fraud. The offense is punishable as a first-degree felony if the amount involved is $100,000 or more. The statute further permits the aggregation of securities fraud, and prosecutors can therefore prosecute widespread schemes involving numerous victims in a single case in a single county.

Prosecutorial assistance
When an investigation uncovers evidence that proves a suspect engaged in securities fraud or another crime tied to a securities offering, the SSB refers the case to the appropriate district attorney’s office. These referrals typically include a summary of the case, the evidence necessary to prove the elements of the offenses, and draft indictments. 

            The referrals recognize that white-collar criminal cases present unique challenges. Prosecutors are often unable to prove financial crimes through traditional evidence, such as a video recording of an altercation or the testimony of a responding officer. Instead, prosecutors may need to secure and introduce voluminous financial records, such as corporate banking records and securities trading statements. These records are often inherently complex, involving numerous transactions and significant amounts of funds. Not surprisingly, prosecutors may need to rely on a witness to audit these files, analyze the use of money, and summarize convoluted transactions for a jury. 

            The SSB can assist local prosecutors in securing and analyzing financial records. State law requires registered financial firms to provide records to the SSB, and the agency often serves confidential administrative duces tecum subpoenas that direct banks and credit unions to produce client files. Its examiners regularly analyze these records to identify victims and audit investment programs, working through criminal cases involving more than $100 million over the last three fiscal years. They can summarize these transactions at trial, providing testimony showing the perpetration of investment scams and the theft or misapplication of victim funds. 

            In many instances, SSB attorneys can serve as expert witnesses in securities laws. Its attorneys also frequently serve as appointed special prosecutors and assist district attorney’s offices in prosecuting securities fraud and related white-collar felonies. Many attorneys are either former prosecutors or have prosecutorial experience, and they can offer their experience and assistance from the time a case is received to its presentation to a grand jury and throughout a trial before a judge or jury.

            Recent sentences include 18 years on a plea agreement in Wichita County for a Galveston oilman who stole nearly $500,000 from investors who purchased investments in oil wells; a 25-year sentence in Jim Wells County—and $2.8 million in restitution—for the owner of an unregistered financial services firm who stole from his clients; and 79 years in prison in Dallas County for the perpetrator of a small-business loan scam. That was one year for each victim in the $4.9 million fraud.

            Prosecutors assigned to cases involving investment scams can contact the SSB through this article’s author, Joe Rotunda. He can be reached at 512/305-8392 or [email protected]

Endnotes

[1] The SSB’s most recent report, “Blind Faith, Fraud, and Millions of Dollars Lost,” is available at https://www.ssb.texas.gov/sites/default/files/YEAR_IN_ENF_2018_post.pdf.

[2] Tex. Rev. Civ. Stat. Arts. 581-1–581-45.