Securities Fraud: How the Government Proves Knowledge and Intent
Securities fraud refers to deceptive practices in connection with the buying and selling of investment instruments like stocks and bonds. To prove securities fraud in court, prosecutors must establish that the defendant acted intentionally or knowingly to deceive investors. This article examines how the government builds its case to demonstrate fraudulent intent.
The Challenges of Proving Intent
Proving intent represents one of the most difficult aspects of securities fraud cases. Unlike some other types of fraud, securities fraud does not require proving that the defendant intended to cause financial harm. However, it does require establishing intent to deceive, manipulate or defraud.
As former federal prosecutor Erich Ferrari explains, “Since direct evidence of fraudulent intent is rare, prosecutors usually have to rely on circumstantial evidence to make their case” . This involves compiling various facts that allow the jury to infer the defendant’s state of mind.
Building this circumstantial case poses major hurdles. As attorney Tom Kirkendall notes, “Circumstantial evidence of intent to defraud is often subject to an innocent explanation” . To overcome this ambiguity, prosecutors utilize methods like wire taps, cooperating witnesses and document analysis to uncover incriminating communications, statements and records.
Strategies for Demonstrating Deceit
While each securities fraud case varies, certain techniques commonly assist the government in proving deceitful intent:
1. Showing the Defendant Lied
One of the strongest ways to demonstrate fraudulent intent involves revealing direct lies by the defendant. As an example, prosecutors in the Enron case showed that CEO Jeffrey Skilling had blatantly misrepresented the company’s financial health to investors, analysts and auditors. These documented false statements allowed the jury to infer that Skilling intended to deceive.
2. Reconstructing Behind-the-Scenes Knowledge
Since securities fraud often entails concealing negative information from investors, prosecutors try uncovering what key players knew behind the scenes.
For instance, in prosecuting the leaders of Ponzi scheme Petters Group Worldwide, attorneys revealed emails and testimonies proving the defendants understood their business was failing even as they persisted in raising money from victims. This inside information suggested the defendants knowingly misled investors to keep their scheme afloat.
3. Establishing Motives to Commit Fraud
Prosecutors frequently highlight motives that would entice a defendant to deliberately deceive. Common motives include trying to:
- Inflate stock prices
- Achieve performance bonuses
- Raise more investment capital
- Avoid losses
If attorneys can demonstrate that a defendant stood to gain financially or avoid major damage through fraud, juries typically find this compelling in inferring intent.
4. Presenting Red Flags the Defendant Ignored
Another method for imputing knowledge involves showing that various warning signs (red flags) existed which the defendant consciously disregarded.
For example, in the prosecution of Theranos founder Elizabeth Holmes, the government detailed numerous danger signs – including whistleblower allegations and inaccurate blood test results – which Holmes supposedly ignored in order to keep perpetuating her company’s fraudulent activities.
5. Using Cooperators to Describe the Defendant’s State of Mind
Finally, prosecutors often rely on cooperating witnesses from inside the defendant’s company to directly testify about their boss’s awareness and intentions. Insider cooperators can provide first-hand accounts of the defendant’s thought process in orchestrating deceitful communications and transactions.
Through one or more of these techniques, securities fraud prosecutors piece together circumstantial proof aimed at demonstrating the defendant’s conscious knowledge and intent to defraud.
The Defendant Attempts to Show Good Faith
Once the government presents its case for fraudulent intent, the defense typically tries neutralizing this evidence. Common strategies include:
1. Depicting the Defendant as an Unknowing Dupe
Attorneys may claim that the defendant lacked direct involvement in fraudulent activities, and higher-ranking insiders tricked the defendant just like other victims.
This tactic aims to portray the defendant as an unwitting pawn who got duped alongside shareholders. However, its success depends on keeping the defendant isolated from damning emails, witnesses and whistleblower complaints.
2. Presenting Business Justifications for the Defendant’s Decisions
Another approach involves attempting to provide innocent explanations for the defendant’s problematic actions. Defense lawyers may cite business factors like industry conditions, previous experiences, expert advice and historical trends to justify the defendant’s choices.
If attorneys can plausibly explain the defendant’s conduct as normal business decision-making, they can blunt accusations of fraudulent intent. But this strategy requires accounting for all the government’s most incriminating evidence without appearing contrived.
3. Blaming Subordinates for Deceitful Acts
Additionally, the defense may shift blame downward in the corporate hierarchy by attributing any misconduct to rogue underlings. Company leaders often claim that they delegated tasks to subordinates who – unbeknownst to executives – engaged in deception.
The viability of this tactic depends on limiting documents and witnesses demonstrating the defendant’s direct participation or awareness. If lower-level scapegoats appear incapable of executing fraud on their own, juries likely dismiss this ploy.
4. Portraying the Government as Overzealous
Finally, defense lawyers sometimes accuse prosecutors of overreaching by trying to manufacture white collar crime where no intention to deceive existed. Attorneys may contend that the government lacks smoking gun proof of intent and instead has cobbled together a speculative case out of business activities that only appear questionable in hindsight.
This approach essentially attempts to dismiss the entire body of circumstantial evidence as failing to definitively establish conscious wrongdoing. Rather than refuting specifics, the defense just tries undercutting the government’s inferences regarding the defendant’s mindset.
The Verdict Comes Down to Competing Narratives
Ultimately securities fraud trials involve warring narratives, with the prosecution assembling a mosaic of proof pointing toward guilt while the defense tries knocking down assumptions of bad intent. By collecting incriminating communications, exposing motives and surfacing red flags, government attorneys attempt to decisively demonstrate fraudulent purpose. Meanwhile the defense endeavors to show an innocent executive trying to properly grow a business amid complex market challenges.
With little direct evidence of the defendant’s state of mind, juries must weigh these competing stories. Their verdict often depends less on any single smoking gun than on whether prosecutors can convincingly dispel all reasonable doubt that the defendant acted intentionally to deceive. The government carries the burden of constructing a compelling tale of culpability, while the defense need only undermine certainty regarding the defendant’s intent. This dynamic explains why, despite vigorous efforts by prosecutors, securities fraud convictions remain difficult to achieve.