Securities are an excellent way for any entity to generate revenue. The traditional security of a stock certificate costs little more than the expense of paper and printing to produce, yet can be sold for fantastic sums of money, especially when millions of certificates are made. The ease with which such devices can be abused prompted the Florida legislature to create various securities and investor protection statutes under chapter 517. This discussion addresses fraudulent transactions and the penalties associated with fraud; explanations on the methods of and rationale behind registrations or exemptions of securities and the pitfalls for failing to do so are beyond our scope.
II. Penalties of Fraudulent Conduct
The first thing to consider in contemplating any action that could verge on securities fraud is that the penalties for fraud are criminal with penalties beyond those remedies usually available to the plaintiff in a civil fraud case. The penalties are listed under Florida Statutes §517.302. The basic penalty for a securities fraud conviction is a third degree felony. If the aggregate amount gained through fraud exceeds $50,000 obtained from five or more people than this increases to a first degree felony. Instead of the fine normally associated with either of these felonies, a person convicted of fraud, or even having merely plead no contest, might be required to pay up to treble the gross amount gained through fraudulent action or up to treble the gross loss caused to victims. The gross amount of the fraud was chosen so that the expenses of perpetrating fraud would not be deducted from this total like the expense of a legitimate business. One of the few saving graces available to those who commit state securities fraud is that the act cannot form the basis of a class action filed under the Securities Litigation Uniform Standards Act. Riley v. Merill Lynch, Pierce, Fenner, & Smith, Inc., 168 F.Supp. 2d 1352 (M.D. Fla. 2001).
Any monies gained from successful convictions are placed into an anti-fraud trust. The money in this trust is used exclusively to fund fraud awareness campaigns and to investigate and prosecute possible fraudulent abuses. The net effect of this trust is to make prosecutors hungrier for victory as money gained subsidizes future state action.
III. Methods of Fraud
The application of fraud in connection with securities is at times both broader than or more limited than the classic definition of fraud. A security constitutes an investment of money, in common enterprise with expectations for profit, derived solely from others efforts. Stottler Stagg and Associates, Inc. v. Argo, 403 So.2d 617 (Fla. 5th DCA 1981); Rudd v. State, 386 So.2d 1216 (Fla. 5th DCA 1980). Moreover, a potential plaintiff need not identify a particular security purchased. Grippo v. Perazzo, 375 F.3d 1218 (11th Cir. 2004).
The only securities related activities exempted from the rules of fraudulent transactions under Florida Statutes §517.301 are investments consisting of commitments of money for purchases of businesses and real property from those licensed under chapter 475 or registered under chapter 498 and through what are effectively door to door sales. This exception only applies to sales of personal property to be delivered in 30 days or less, accompanied by a 10 day from date of delivery refund option, have representations of economic benefits to be gained in purchase, and are not conducted over the phone. Basically, this exempts a door to door encyclopedia sales and scout cookie sales.
In practice, employing a scheme that obtains money for another entity with investment advice, sale, or purchase, even of securities exempted under §517.051 and §517.061, through deception is committing one or more acts of securities fraud. Similarly, employing false documents or assisting an activity by omitting information are all acts of fraud. Promoting the sale of a security or promoting the existence of a security are fraudulent acts if the promoter does not disclose all compensation the promoter has received or will receive in connection with the promotion. Ward v. Atlantic Sec. Bank, 777 So.2d 1144 (Fla. 3d DCA 2001). Additionally, the Florida statutes are similar to Federal 10b-5 rules so Florida courts will look to similar federal cases for guidance in how to best decide a case.