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    Criminal Defense Division

    California “Securities Fraud” Laws & Penalties

    Updated

    The phrase “securities fraud” may bring to mind overpaid bankers who come up with complicated illegal schemes, make a huge amount of money, and then get sent to comfortable prisons for white-collar criminals after they get caught.

    But in fact, the reality for most people accused of California securities fraud crimes is very different. You can run into trouble with California securities laws if you are a small entrepreneur trying to raise money for your business, or an employee just doing what your boss asked you to do.

    Even worse, the criminal penalties for securities fraud can be surprisingly tough. Securities fraud crimes in California are “wobblers“, which means that they may be prosecuted as either misdemeanors or, in some cases, felonies1.  If you are convicted, you can face enormous fines and even imprisonment.2

    In this article, our criminal defense attorneys 3 explain criminal securities fraud under California law by addressing the following:

    Hooded man behind laptop in front of background that says gold, silver, etc.

    It is a California crime to knowingly lie to someone to get them to buy or sell securities.

    1. What are securities fraud laws, and why do they exist?

    1.1. What are securities?

    You can’t commit securities fraud under California law unless you are somehow involved with securities in the first place.4

    Most people aren’t really sure what “securities” are. The definition provided by the California legislature is not terribly helpful…it’s almost five hundred words (500) words long!5

    To make matters worse, the California Supreme Court has said that the definition of a security needs to be decided on a case-by-case basis.6 So there’s no easy rule for figuring out whether something is a security under California law.

    Still, we do have some general idea of what a security is. Generally speaking, a security is a business arrangement under which someone gets an ownership stake in a business entity and/or a right to re-payment of a debt.7 Types of securities include:

    • Stock in a corporation;8
    • A note showing that a company owes money to the person who holds the note;9
    • A certificate showing that the holder has an interest in some kind of profit-sharing arrangement;10
    • An interest in a limited liability company (sometimes);11 and
    • A limited partner’s interest in a limited partnership.12

    Here’s an example of a business transaction that is governed by securities fraud laws:

    Bill invents an incredible pill that causes everyone who takes it to lose weight. He wants to sell this pill but has no money to start producing or marketing it. So he puts an ad on the Internet asking for people to invest money in his company. For each $1,000 someone invests, they get a share of stock in the company and a right to a portion of the profits it will make. Bill is selling securities to his investors.

    But the securities laws do not apply every time people go into business together.  It’s not a security when the people investing in a business are also going to be involved in running it.13 So, for example:

    Bill invents a very effective diet pill. He knows how to make the pill but he doesn’t have enough money to start producing it in large numbers, and he has no idea how to manage a company’s finances or sell a diet pill to customers. On the Internet, he meets Ted, who has money to invest and is an accountant. He also meets Nancy, who likewise has money to invest and who knows a lot about sales and marketing.

    Ted and Nancy invest in Bill’s company and receive shares of stock. All three of Bill, Ted, and Nancy run the company together. Bill oversees the manufacturing process, Ted handles the company’s books and finances, and Nancy handles marketing.

    This is NOT a sale of securities because all the owners of the business are helping to manage the company.14

    1.2. History of securities fraud laws

    Securities fraud is not like theft or murder-it’s not the kind of behavior that’s always been a crime. Instead, over the past hundred years, states (including California) and the federal government have decided to make certain activities a crime in order to protect investors.

    Securities fraud laws first appeared in the United States in the decades before the Great Depression that started in 1929. During this era, it became common for individuals to invest in company stock or speculative business arrangements. Some of these arrangements were fraudulent schemes that delivered nothing to their investors.15

    At first, it was the states that passed laws regulating the sale of securities. These laws are still known as “blue sky laws.” This phrase comes from the creative description of certain fraudulent investment schemes as being based in only “so many feet of ‘blue sky'”16-in other words, the investors get nothing concrete for their money.

    The point of these laws was to protect investors from being swindled by people who were selling shares in things like gold mines that didn’t exist and companies they never intended to start.17

    Federal securities laws came along later, when the United States Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934.18 More recent federal securities laws that you may have heard about in the news are the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

    Current securities fraud law in California comes mostly from the California Corporate Securities Law of 1968.

    Securities fraud is a so-called “white-collar crime”.

    Financial graph with magnifying glass

    A defense to securities fraud is that the defendant had no intent to defraud.

    2. What kind of actions can lead to criminal penalties for securities fraud?

    Securities fraud is a very complicated area of California criminal law. In this section, we discuss the main ways in which a person or company can face criminal liability for violations of California’s securities laws.

    2.1. Selling unqualified securities

    If you want to sell securities in California, or offer securities for sale in California, you may need to “qualify” the securities with the California Department of Corporations.19 Qualification of the securities involves extensive paperwork and disclosures about the company issuing the securities.20

    Amazingly enough, the simple failure to complete this paperwork can result in serious criminal penalties, including even jail time. 21

    2.1.1. Securities exempt from qualification

    Luckily, the qualification requirement does not apply to all sales of securities in California. Certain sales and sale offers are exempt and don’t need to be qualified.22

    One category of exempt sale often comes up when individuals or smaller businesses are accused of securities fraud for selling or offering unqualified securities. This is an exemption for a sale to a relatively small number of people, each of whom either has a preexisting relationship with the person selling the securities or is a sophisticated investor.23

    Basically, you can avoid criminal penalties for selling unqualified securities if all of the following are true:

    1. You sold securities or made the offer to no more than thirty-five (35) people (a husband and wife together count as one person);
    2. Everyone who bought the security did so for their own account (that is, not planning to re-sell or distribute it to someone else);
    3. You did not publish any advertisement in connection with selling or offering the security; AND
    4. Everyone who bought or was offered the security either had a preexisting personal or business relationship with you OR is someone who had significant business or financial experience and could be considered capable of protecting their own interests.24

    Earlier in this article, we mentioned the example of Bill, who puts an ad on the Internet seeking investors for his diet pill company. Because Bill published an advertisement in connection with the sale of the security, he is not exempt from the requirement that he qualify the security with the Department of Corporations.25 If he doesn’t meet the requirement, he could face criminal penalties for California securities fraud.26

    But now let’s imagine Bill proceeded somewhat differently:

    Bill invents an incredible pill that causes everyone who takes it to lose weight. He wants to sell this pill but has no money to start producing or marketing it. But he has ten cousins who are quite wealthy. He also has ten high school classmates whom he stays in touch with and who have money to invest.

    Bill calls all twenty of these people to ask if they want to buy shares in the company he plans to form. They are all interested.

    One of Bill’s cousins also tells Bill he should contact a friend of his named Louise. Louise is an experienced “angel investor” who has run her own investment fund and also invests her own money in new companies. Bill contacts Louise and asks her if she would like to invest in his company.

    Bill has not qualified his offering of stock in his company with the Department of Corporations. But he will NOT face any criminal penalties for this because . . .

    . . . He only offered shares to twenty-one people (ten cousins, ten classmates, and Louisa), which is less than thirty-five. He did not advertise the investment opportunity to the general public. AND all of the people to whom he offered stock either had a preexisting personal relationship with him or, in Louisa’s case, were experienced investors who can look out for themselves.27

    This exemption from the qualification requirement only goes so far, however. Though you can sell securities to a friend or colleague and still be exempt, you probably can’t sell or offer securities to a friend of a friend with whom you don’t personally have a relationship, unless that person is a sophisticated investor.28

    To illustrate this, let’s change the example of Bill again:

    Bill contacts his ten wealthy cousins to ask if they want to invest in his new diet pill company. One of his cousins is actually not interested but tells Bill to contact his friend Al. Al is not an experienced investor. He is an artist who has just inherited some money from his grandmother. He and Bill have never met before.

    Bill offers Al the chance to buy stock in his company, and Al accepts. Bill has not qualified his offering with the Department of Corporations.

    In this case, there’s a good chance Bill WILL face criminal penalties. He did not have a preexisting relationship with Al, and Al was not a sophisticated investor who could be trusted to take care of himself in the transaction.29

    2.1.2. Good-faith belief that securities were exempt

    What happens if you honestly believe that you’re not required to qualify a securities offering with the Department of Corporations, but after you go ahead and sell securities you find out that in fact you were required to do so? For example, what if Al, the artist in the last example, told Bill that he had lots of investment experience even though that wasn’t true?

    It’s only a crime if you “willfully” sell securities without complying with the qualification requirement.30 Therefore, if you believed in good faith that you weren’t violating the law, you are not criminally liable.31

    2.2. Selling securities that don’t comply with qualification terms

    Here’s another thing to know about the qualification requirement: it’s also a securities fraud crime in California to sell or offer securities for sale in a way that doesn’t comply with the information you put in the qualification paperwork.32

    An example of how this rule works is this:

    Chuck is the CEO of a company that wants to sell bonds to the general public. He makes sure that he complies with California securities laws by qualifying the offering with the Department of Corporations. In the paperwork he files, he states that none of his employees will receive bonuses for closing a sale of these bonds. (This is so that they won’t be motivated to put too much pressure on people to buy the bonds.)

    Chuck does end up giving bonuses to some of his employees for selling the bonds, though. Because he did not abide by the rules he set out in his qualification paperwork, he could face criminal penalties for securities fraud.33

    2.3. Misleading behavior in the purchase or sale of securities

    Let’s say you are someone who doesn’t own or run a company and is in no position to issue securities to anyone. That doesn’t mean you don’t have to worry about California securities fraud laws. There are several ways to run afoul of those laws if you only own or trade securities.

    The California Corporations Code makes it illegal to engage in certain activities designed to give a false or misleading impression about the market for a certain security. Basically, you are not allowed to willfully trade any security in a way that will manipulate the market for it.34

    What kind of activities can land you in trouble under this law?  Here are some major examples:

    • Trading in a security in a way that involves no real change in ownership, for the purpose of making a false or misleading impression.35 Example: Let’s say Dan owns 10,000 shares of McWidget Corporation. Dan is also the sole owner of a limited liability company called Dan, LLC. Dan arranges to have Dan, LLC buy the 10,000 shares of McWidget Corporation from himself.
    • Other investors don’t know that Dan owns Dan, LLC. The big purchase makes them think that they should buy shares of McWidget Corporation too. They buy shares, the price goes up, and Dan is now a lot richer than he was before. BUT he is also guilty of California securities fraud, if that was his goal in arranging the sale.
    • Entering an order to sell or buy securities when you know someone else is going to enter an offsetting order of the same size, for the purpose of making a false or misleading impression.36This generally happens because heavy trading of a company that’s traded on a stock exchange can lead to an increase in its price. Let’s say Penny Stock, Inc. is a small company that has just gone public and whose share price is very low.
    • The executives of Penny Stock, Inc. set up some shell companies that do nothing but sell shares of Penny Stock, Inc. to each other. All this trading activity attracts the attention of professional investors, who buy shares themselves.
    • The share price of Penny Stock, Inc. will go up. But its executives are guilty of violating California securities fraud laws.
    Calculator, handcuffs, cash, and financial statements

    Securities fraud can be a misdemeanor or a felony in California.

    2.4. False or misleading statements in the sale of securities

    As you might expect, it’s illegal to knowingly lie to someone to get them to buy or sell securities.37 This is a classic form of criminal fraud.

    You can violate this law by directly misrepresenting the facts in order to persuade someone to enter into a securities transaction with you.38 For example:

    George owns stock in Kramer Corp., which has been losing money lately. He wants to sell the stock, but the market for it is small. He tells Jerry that Kramer Corp. just earned a big government contract (which George knows is untrue) in order to get Jerry to buy the stock from him. This is securities fraud.

    But you can also violate this law by being silent about key facts, in a way that is more or less the same as lying.39 For example:

    George wants Jerry to buy his Kramer Corp. stock. But Jerry is hesitant. George sends Jerry an email telling him that their friend Elaine, a reporter, is about to an article about the company in The Wall Street Journal and that now is a great time to buy the stock. Jerry agrees to buy the stock.

    What George didn’t tell Jerry is that Elaine’s article is mostly about how badly-run Kramer Corp. is. His failure to tell Jerry this was very misleading in context and so is also securities fraud.

    2.5. Insider trading

    Insider trading is one of the best-known forms of securities fraud. If you have access to insider information about a company – that is, information that’s not available to the general public and that you know only because of your special relationship with the company-it’s a crime to buy or sell the securities of that company based on that information.40

    Here’s an example of illegal insider trading:

    Elaine is a secretary at a law firm. One of the firm’s clients, Kramer Corp., is planning on filing for bankruptcy. Elaine has been preparing documents in connection with the filing. They are all marked “Top Secret,” and the lawyers she works for have told her it’s very important not to tell anyone about the bankruptcy.

    Elaine calls up her stockbroker and executes a “short sale” of Kramer Corp. stock (a transaction that will cause her to make money if the stock price goes down). When the bankruptcy is made public, the stock price tanks, and Elaine makes a fortune. But she is also guilty of insider trading.

    Note however that it’s only illegal to trade on the basis of information that you acquired because of your special relationship with the company.41 If you manage to come across information that the general public isn’t aware of yet, and you didn’t get that information through any special relationship with the company, it’s not a crime to trade in the company’s securities.

    Here’s another example illustrating this:

    Jerry likes to read proposed government rules in his spare time. Through this reading, he learns that a product safety agency is considering banning unicycles because they’re unsafe. The news media hasn’t paid any attention to this proposed rule.

    Unicycles are the main product produced by Kramer Corp. Jerry calls his stockbroker and arranges a short sale of Kramer Corp. stock. Unicycles are eventually banned, and Kramer Corp.’s stock price falls steeply. Jerry makes a lot of money. He did not commit securities fraud, though.

    3. Penalties for securities fraud

    3.1. California penalties

    Securities fraud is a “wobbler”, which means that it may be prosecuted as either a misdemeanor or a felony.42 If you violate California securities fraud laws, you can face huge fines and even be sentenced to time in prison.

    If you “willfully” sell or offer to sell securities in California without complying with the qualification requirement, or if you sell securities in a way that violates the terms of the qualification, you face:

    • up to one million dollars ($1,000,000) in fines, and/or
    • 16 months, or two or three years in county jail.43

    If you willfully engage in market manipulation, make a false or misleading statement in a securities transaction, or engage in insider trading, the penalties are even steeper.  You face:

    • up to ten million dollars ($10,000,000) in fines, and/or
    • two (2), three (3) or five (5) years in county jail.44

    3.2. Federal securities fraud laws

    Securities fraud is not only a California crime. It is also a federal crime. If you are charged with California securities fraud, you may also face federal charges.

    Most federal securities fraud cases are first investigated by the Securities and Exchange Commission (also known as the SEC). The federal Department of Justice will then get involved if criminal charges will be filed.

    Federal penalties for securities fraud are even harsher than those under California law. Willful violations of the federal securities fraud laws can land you in federal prison for up to twenty years!45

    Because you can face both California and federal charges for securities fraud, it’s a very good idea to have a top-notch California criminal defense attorney who can also practice in federal court.

    3.3. Civil suits for California securities fraud

    If you are accused of securities fraud, in addition to criminal charges, you may have to defend a civil lawsuit by people who claim they were harmed by your behavior.46 If this kind of lawsuit is successful, you may have to pay damages to those people that can easily exceed the criminal fines you would face for the same behavior.47

    The California Department of Corporations can also issue civil penalties for violations of the securities fraud laws. These penalties cannot exceed twenty-five thousand dollars ($25,000) per violation.48

    4. How can I defend myself?

    If you are accused of California securities fraud, there are legal defenses available to help you beat the charges.

    The most useful of these is probably lack of criminal intent. You can’t be convicted of securities fraud in California unless you acted “willfully.”49

    According to Oakland criminal defense attorney Jim Hammer50,

    “Securities fraud cases tend to involve complicated business transactions, and it’s easy for people to get tangled up in them because of something they did only accidentally or negligently. But the California Corporate Securities Law of 1968 does not allow criminal penalties to be assessed unless the defendant broke the law ‘willfully.’ This means that the defendant has to have known what he was doing and acted on purpose. If the state can’t show that that’s true, then we can beat the charges.”

    Receptionist with headset on

    Call our law firm for help.

    If you or a loved one is charged with securities fraud and you are looking to hire an attorney for representation, we invite you to contact us at Shouse Law Group. We can provide a free consultation in the office or by phone. We have local offices in Los Angeles, the San Fernando Valley, Pasadena, Long Beach, Orange County, Ventura, San Bernardino, Rancho Cucamonga, Riverside, San Diego, Sacramento, Oakland, San Francisco, San Jose and throughout California.

    Also see our article on Nevada securities fraud laws (NRS 90.650).

    Online Resources:

    California Department of Financial Protection and Innovation

    Securities and Exchange Commission

    Legal References:

    1. Corporations Code 25540. (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order. (b) Any person who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code for two, three, or five years, or be punished by both that fine and imprisonment.”)
      See also Corporations Code 25541. (“(a) Any person who willfully employs, directly or indirectly, any device, scheme, or artifice to defraud in connection with the offer, purchase, or sale of any security or willfully engages, directly or indirectly, in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the offer, purchase, or sale of any security shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code for two, three, or five years, or be punished by both that fine and imprisonment.”)
      See also California Penal Code 1170(h) PC. (“(h)(1) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years. (2) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision shall be punishable by imprisonment in a county jail for the term described in the underlying offense.”)
    2. See same.
    3. Our California criminal defense attorneys have local Los Angeles law offices in Beverly Hills, Burbank, Glendale, Lancaster, Long Beach, Los Angeles, Pasadena, Pomona, Torrance, Van Nuys, West Covina, and Whittier.  We have additional law offices conveniently located throughout the state in Orange County, San Diego, Riverside, San Bernardino, Ventura, San Jose, Oakland, the San Francisco Bay area, Sacramento, and several nearby cities.
    4. For example, see Corporations Code 25110 – Necessity of qualification of security or exemption of security or transaction (“It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112 or 25113 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part.”); Corporations Code 25400 – Unlawful acts of misrepresentations to induce purchase or sale of securities or to manipulate price (“It is unlawful for any person, directly or indirectly, in this state:(a) For the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading appearance with respect to the market for any security, (1) to effect any transaction in a security which involves no change in the beneficial ownership thereof, or (2) to enter an order or orders for the purchase of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (3) to enter an order or orders for the sale of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the purchase of any such security, has been or will be entered by or for the same or different parties.”); Corporations Code 25401 – Sale or purchase of securities by means of written or oral communications containing false statements or omissions (“It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”); and Corporations Code 25402 – Purchase or sale of securities by person having access to material information not available to public through special relationship with issuer (“It is unlawful for an issuer or any person who is an officer, director or controlling person of an issuer or any other person whose relationship to the issuer gives him access, directly or indirectly, to material information about the issuer not generally available to the public, to purchase or sell any security of the issuer in this state at a time when he knows material information about the issuer gained from such relationship which would significantly affect the market price of that security and which is not generally available to the public, and which he knows is not intended to be so available, unless he has reason to believe that the person selling to or buying from him is also in possession of the information.”).
    5. Corporations Code 25019 – Security. (“‘Security’ means any note; stock; treasury stock; membership in an incorporated or unincorporated association; bond; debenture; evidence of indebtedness; certificate of interest or participation in any profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; viatical settlement contract or a fractionalized or pooled interest therein; life settlement contract or a fractionalized or pooled interest therein; voting trust certificate; certificate of deposit for a security; interest in a limited liability company and any class or series of those interests (including any fractional or other interest in that interest), except a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company; provided that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, shall not establish, without more, that all members are actively engaged in the management of the limited liability company; certificate of interest or participation in an oil, gas or mining title or lease or in payments out of production under that title or lease; put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof); or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; any beneficial interest or other security issued in connection with a funded employees’ pension, profit sharing, stock bonus, or similar benefit plan; or, in general, any interest or instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. All of the foregoing are securities whether or not evidenced by a written document. ‘Security’ does not include: (1) any beneficial interest in any voluntary inter vivos trust which is not created for the purpose of carrying on any business or solely for the purpose of voting, or (2) any beneficial interest in any testamentary trust, or (3) any insurance or endowment policy or annuity contract under which an insurance company admitted in this state promises to pay a sum of money (whether or not based upon the investment performance of a segregated fund) either in a lump sum or periodically for life or some other specified period, or (4) any franchise subject to registration under the Franchise Investment Law (Division 5 (commencing with Section 31000)), or exempted from registration by Section 31100 or 31101.”)
    6. People v. Figueroa, (1986) 41 Cal.3d 714, 736. (“These cases underscore the fact that the corporate securities laws do not contain an all-inclusive formula by which to test the facts in every case. And the courts have refrained from attempting to formulate such a test. Whether a particular instrument is to be considered a security within the meaning of the statute is a question to be determined in each case. In arriving at a determination the courts have been mindful that the general purpose of the law is to protect the public against the imposition of unsubstantial, unlawful and fraudulent stock and investment schemes and the securities based thereon.”) (citations omitted)
    7. Black’s Law Dictionary (9th ed. 2009), security. (“Security . . . 4. An instrument that evidences the holder’s ownership rights in a firm (e.g., a stock), the holder’s creditor relationship with a firm or government (e.g., a bond), or the holder’s other rights (e.g., an option).”)
    8. Corporations Code 25019.
    9. Same.
    10. Same.
    11. Same.
    12. People v. Simon, (1995) 9 Cal.4th 493, 499. (“A limited partnership interest may be a security as defined by section 25019 the Corporate Securities Law of 1968 . . . because the investor provides capital that will be risked in the enterprise and is not involved in management.”)
    13. People v. Figueroa, supra, 740. (“It is evident from the foregoing analysis that Kurrle’s participation in appellants’ business was relevant to the issue of whether the ‘Corporation Promissory Note’ was a ‘security.'”)
    14. People v. Frederick, (2006) 142 Cal.App.4th 400, 413-14.
    15. Legal Information Institute, Legal Encyclopedia, “Blue Sky Law.”
    16. Hall v. Geiger Jones Co., (1917) 242 U.S. 539, 550.
    17. Same, at 550-51. (“The name that is given to the law indicates the evil at which it is aimed; that is, to use the language of a cited case, ‘speculative schemes which have no more basis than so many feet of ‘blue sky;’ or, as stated by counsel in another case, ‘to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations.’ Even if the descriptions be regarded as rhetorical, the existence of evil is indicated, and a belief of its detriment; and we shall not pause to do more than state that the prevention of deception is within the competency of government, and that the appreciation of the consequences of it is not open for our review.”)
    18. Legal Information Institute, Legal Encyclopedia, “Securities Law History.”
    19. Corporations Code 25110 – Necessity of qualification of security or exemption of security or transaction. (“It is unlawful for any person to offer or sell in this state any security in an issuer transaction (other than in a transaction subject to Section 25120), whether or not by or through underwriters, unless such sale has been qualified under Section 25111, 25112 or 25113 (and no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification) or unless such security or transaction is exempted or not subject to qualification under Chapter 1 (commencing with Section 25100) of this part.”)
    20. The forms involved in qualification can be found at the website of the California Department of Corporations.
    21. Corporations Code 25540(a) – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order.”)  See also Penal Code 1170(h) PC – Determinate sentencing. (“(h)(1) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years. (2) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision shall be punishable by imprisonment in a county jail for the term described in the underlying offense. (3) Notwithstanding paragraphs (1) and (2), where the defendant (A) has a prior or current felony conviction for a serious felony described in subdivision (c) of Section 1192.7 or a prior or current conviction for a violent felony described in subdivision (c) of Section 667.5, (B) has a prior felony conviction in another jurisdiction for an offense that has all the elements of a serious felony described in subdivision (c) of Section 1192.7 or a violent felony described in subdivision (c) of Section 667.5, (C) is required to register as a sex offender pursuant to Chapter 5.5 (commencing with Section 290) of Title 9 of Part 1, or (D) is convicted of a crime and as part of the sentence an enhancement pursuant to Section 186.11 is imposed, an executed sentence for a felony punishable pursuant to this subdivision shall be served in state prison. (4) Nothing in this subdivision shall be construed to prevent other dispositions authorized by law, including pretrial diversion, deferred entry of judgment, or an order granting probation pursuant to Section 1203.1. (5) The court, when imposing a sentence pursuant to paragraph (1) or (2) of this subdivision, may commit the defendant to county jail as follows: (A) For a full term in custody as determined in accordance with the applicable sentencing law. (B) For a term as determined in accordance with the applicable sentencing law, but suspend execution of a concluding portion of the term selected in the court’s discretion, during which time the defendant shall be supervised by the county probation officer in accordance with the terms, conditions, and procedures generally applicable to persons placed on probation, for the remaining unserved portion of the sentence imposed by the court. The period of supervision shall be mandatory, and may not be earlier terminated except by court order. During the period when the defendant is under such supervision, unless in actual custody related to the sentence imposed by the court, the defendant shall be entitled to only actual time credit against the term of imprisonment imposed by the court. (6) The sentencing changes made by the act that added this subdivision shall be applied prospectively to any person sentenced on or after October 1, 2011.”)
    22. Corporations Code 25102 – Transactions exempt from provisions of section 25110.
    23. Corporations Code 25102(f) – Transactions exempt from provisions of section 25110. (“The following transactions are exempted from the provisions of Section 25110: . . . (f) Any offer or sale of any security in a transaction (other than an offer or sale to a pension or profit-sharing trust of the issuer) that meets each of the following criteria: (1) Sales of the security are not made to more than 35 persons, including persons not in this state. (2) All purchasers either have a preexisting personal or business relationship with the offeror or any of its partners, officers, directors or controlling persons, or managers (as appointed or elected by the members) if the offeror is a limited liability company, or by reason of their business or financial experience or the business or financial experience of their professional advisers who are unaffiliated with and who are not compensated by the issuer or any affiliate or selling agent of the issuer, directly or indirectly, could be reasonably assumed to have the capacity to protect their own interests in connection with the transaction. (3) Each purchaser represents that the purchaser is purchasing for the purchaser’s own account (or a trust account if the purchaser is a trustee) and not with a view to or for sale in connection with any distribution of the security. (4) The offer and sale of the security is not accomplished by the publication of any advertisement. The number of purchasers referred to above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limited liability company, and any other purchaser who the commissioner designates by rule. For purposes of this section, a husband and wife (together with any custodian or trustee acting for the account of their minor children) are counted as one person and a partnership, corporation, or other organization that was not specifically formed for the purpose of purchasing the security offered in reliance upon this exemption, is counted as one person. The commissioner may by rule require the issuer to file a notice of transactions under this subdivision. The failure to file the notice or the failure to file the notice within the time specified by the rule of the commissioner shall not affect the availability of this exemption. An issuer who fails to file the notice as provided by rule of the commissioner shall, within 15 business days after discovery of the failure to file the notice or after demand by the commissioner, whichever occurs first, file the notice and pay to the commissioner a fee equal to the fee payable had the transaction been qualified under Section 25110.”)
    24. Same.
    25. Same.
    26. Corporations Code 25110 – Necessity of qualification of security or exemption of security or transaction.
    27. Corporations Code 25102(f) – Transactions exempt from provisions of section 25110.
    28. People v. Graham, (1985) 163 Cal.App.3d 1159, 1172. (“Graham does not contest that Grady had no preexisting relationship with either Chapek or Graham. He asserts, however, that Grady was portrayed as having a sufficiently close preexisting relationship with Krueger to satisfy the test. Krueger’s nebulous and relatively insignificant role in the venture-largely that of a glorified investor-was such that the jury could reasonably conclude that whatever Grady’s relationship with Krueger, it was insufficient to allow him any insight into the ‘character, business acumen and general business and financial circumstances’ of the persons who would control and manage the venture, namely Graham and Chapek.”)
    29. Same.
    30. Corporations Code 25540(a) – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order.”)
    31. People v. Salas, (2006) 37 Cal.4th 967, 971. (“Like the Court of Appeal, we hold that a seller who believes reasonably and in good faith that a security is exempt is not guilty of the crime of unlawful sale of an unregistered security. As in other similar cases, the severity of the penalties attached to this crime persuade us that the Legislature did not mean to impose criminal liability on defendants who lacked guilty knowledge of facts essential to make the conduct criminal.”)
    32. People v. Keating, (1993) 21 Cal.App.4th 145, 154. (“Thus, we hold that selling qualified securities in violation of conditions imposed in the authorizing qualification is a crime prohibited by sections 25110 and 25540, and the trial court erred in finding otherwise and dismissing the counts charging Keating with those crimes.”)
    33. See same, at 149-50.
    34. Corporations Code 25400 – Unlawful acts of misrepresentations to induce purchase or sale of securities or to manipulate price. (“It is unlawful for any person, directly or indirectly, in this state:(a) For the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading appearance with respect to the market for any security, (1) to effect any transaction in a security which involves no change in the beneficial ownership thereof, or (2) to enter an order or orders for the purchase of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (3) to enter an order or orders for the sale of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the purchase of any such security, has been or will be entered by or for the same or different parties. (b) To effect, alone or with one or more other persons, a series of transactions in any security creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others. (c) If such person is a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to induce the purchase or sale of any security by the circulation or dissemination of information to the effect that the price of any such security will or is likely to rise or fall because of market operations of any one or more persons conducted for the purpose of raising or depressing the price of such security. (d) If such person is a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to make, for the purpose of inducing the purchase or sale of such security by others, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or which omitted to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and which he knew or had reasonable ground to believe was so false or misleading.(e) For a consideration, received directly or indirectly from a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to induce the purchase or sale of any security by the circulation or dissemination of information to the effect that the price of such security will or is likely to rise or fall because of the market operations of any one or more persons conducted for the purpose of raising or depressing the price of such security.”)
    35. Same. (“It is unlawful for any person, directly or indirectly, in this state: (a) For the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading appearance with respect to the market for any security, (1) to effect any transaction in a security which involves no change in the beneficial ownership thereof, . . . .”)
    36. Same. (“It is unlawful for any person, directly or indirectly, in this state: (a) For the purpose of creating a false or misleading appearance of active trading in any security or a false or misleading appearance with respect to the market for any security, . . . (2) to enter an order or orders for the purchase of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or (3) to enter an order or orders for the sale of any security with the knowledge that an order or orders of substantially the same size, at substantially the same time and at substantially the same price, for the purchase of any such security, has been or will be entered by or for the same or different parties.”)
    37. Corporations Code 25401 – Sale or purchase of securities by means of written or oral communications containing false statements or omissions. (“It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”)
    38. Same.
    39. Same.
    40. Corporations Code 25402 – Purchase or sale of securities by person having access to material information not available to public through special relationship with issuer. (“It is unlawful for an issuer or any person who is an officer, director or controlling person of an issuer or any other person whose relationship to the issuer gives him access, directly or indirectly, to material information about the issuer not generally available to the public, to purchase or sell any security of the issuer in this state at a time when he knows material information about the issuer gained from such relationship which would significantly affect the market price of that security and which is not generally available to the public, and which he knows is not intended to be so available, unless he has reason to believe that the person selling to or buying from him is also in possession of the information.”)
    41. Same.
    42. Corporations Code 25540(a) – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order.”)  See also Penal Code 1170(h) PC – Determinate sentencing. (“(h)(1) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years. (2) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision shall be punishable by imprisonment in a county jail for the term described in the underlying offense.”)  See also Penal Code 17 PC – Felony; misdemeanor; infraction; classification of offenses. (“(a) A felony is a crime that is punishable with death, by imprisonment in the state prison, or notwithstanding any other provision of law, by imprisonment in a county jail under the provisions of subdivision (h) of Section 1170. Every other crime or public offense is a misdemeanor except those offenses that are classified as infractions. (b) When a crime is punishable, in the discretion of the court, either by imprisonment in the state prison or imprisonment in a county jail under the provisions of subdivision (h) of Section 1170, or by fine or imprisonment in the county jail, it is a misdemeanor for all purposes under the following circumstances: (1) After a judgment imposing a punishment other than imprisonment in the state prison or imprisonment in a county jail under the provisions of subdivision (h) of Section 1170. (2) When the court, upon committing the defendant to the Division of Juvenile Justice, designates the offense to be a misdemeanor. (3) When the court grants probation to a defendant without imposition of sentence and at the time of granting probation, or on application of the defendant or probation officer thereafter, the court declares the offense to be a misdemeanor. (4) When the prosecuting attorney files in a court having jurisdiction over misdemeanor offenses a complaint specifying that the offense is a misdemeanor, unless the defendant at the time of his or her arraignment or plea objects to the offense being made a misdemeanor, in which event the complaint shall be amended to charge the felony and the case shall proceed on the felony complaint. (5) When, at or before the preliminary examination or prior to filing an order pursuant to Section 872, the magistrate determines that the offense is a misdemeanor, in which event the case shall proceed as if the defendant had been arraigned on a misdemeanor complaint.”)
    43. Corporations Code 25540(a) – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order.”)
      See also Penal Code 1170(h)(1) (“Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years.”)
    44. Corporations Code 25540(b) – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(b) Any person who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code for two, three, or five years, or be punished by both that fine and imprisonment.”)
    45. 15 U.S.C. 78ff(a). (“(a) Willful violations; false and misleading statements. Any person who willfully violates any provision of this chapter (other than section 78dd-1 of this title), or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, or by any self-regulatory organization in connection with an application for membership or participation therein or to become associated with a member thereof, which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both, except that when such person is a person other than a natural person, a fine not exceeding $25,000,000 may be imposed; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.”)
    46. See, e.g., Corporations Code 25500 – Participation in acts, or transactions in violation of section 25400; damages; Corporations Code 25501 – Violation of section 25401; suit for rescission or damages; defense; Corporations Code 25502 – Violation of section 25402; damages; and Corporation Code 25503 – Sale of securities in violation of certain sections; damages; qualification of security prior to payment or receipt of consideration.
    47. Same.
    48. Corporations Code 25535 – Violations; civil penalties. (“(a) Any person who violates any provision of this law, or who violates any rule or order under this law, shall be liable for a civil penalty not to exceed twenty-five thousand dollars ($25,000) for each violation, which shall be assessed and recovered in a civil action brought in the name of the people of the State of California by the commissioner in any court of competent jurisdiction. (b) As applied to the penalties for acts in violation of this division, the remedies provided by this section and by other sections of this division are not exclusive, and may be sought and employed in any combination to enforce the provisions of this division. (c) No action shall be maintained to enforce any liability created under subdivision (a) unless brought before the expiration of four years after the act or transaction constituting the violation.”)
    49. Corporations Code 25540 – Violations of Corporate Securities Law or rules or orders thereunder; punishment.  (“(a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order. (b) Any person who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code for two, three, or five years, or be punished by both that fine and imprisonment.”)
    50. Oakland criminal defense attorney Jim Hammer used to work for the homicide unit of the San Francisco D.A.’s office. He defends clients in everything from DUI and drug charges to more serious charges. Mr. Hammer represents clients in the Santa Clara County courts, the Contra Costa County courts, and the Alameda County courts, among other locations.

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