The Texas State Securities Board (“TSSB”) is an independent administrative agency; it is not part of the Office of the Attorney General (“AG”) or any other agency. The TSSB has approximately 100 employees, and approximately half of those employees have at least a bachelor’s degree. At any given time, about 5 to 10 employees have accounting degrees or are Certified Public Accountants (“CPA”) and about 25 employees are attorneys. The mission of the TSSB is to protect Texas investors.
One of the primary ways the TSSB purports to protect Texas investors is by investigating and prosecuting those individuals it believes have sold unregistered securities, sold securities without a license, and/or engaged in securities fraud. There are numerous state and federal exemptions to registration that are beyond the scope of this article. However, the general rule is that securities offerings must be registered, and anyone that sells or offers to sell securities must also be registered. Offering for sale and/or selling unregistered securities with no applicable exemption is a third-degree felony. Selling securities without a securities license is also a third-degree felony. In other words, you can be charged with two third-degree felonies for the exact same transaction—selling unregistered securities and selling securities without a license.
The TSSB also frequently prosecutes individuals for securities fraud. So what is securities fraud? First, we have to decide what is a security. Most people think of stocks and bonds as securities and not much else, but the definition is much broader. “Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.” SEC v. Edwards, 540 U.S. 389 (2004). Without getting too technical, if there is an investment of money, it may be a security. Some unusual things that have been found to be securities include investments in sale leasebacks, worms (yes, the things in your garden), ATMs, and payphones.
Next, we must decide what is fraud for purposes of securities fraud under the Texas Securities Act. The definition that the TSSB usually uses is intentional failure to disclose a material fact. A material fact is anything a reasonable investor would want to know when deciding whether or not to invest. The most common thing individuals are prosecuted for failing to disclose is their criminal history. The reason this is routinely done is so that the criminal history of the defendant can be discussed during the case in chief, not just the punishment phase. Witness after witness will take the stand and testify that had they known about your client’s criminal history, they would have never invested. Needless to say, the TSSB’s conviction rate is extremely high.
In addition, like any good plaintiff’s lawyer, the TSSB forum-shops. Some jurisdictions will appoint TSSB attorneys as special prosecutors, other jurisdictions will handle the case themselves after a referral from the TSSB, and some jurisdictions will ignore the referral altogether and do nothing. The TSSB generally prefers jurisdictions where punishments are severe and TSSB attorneys will be appointed special prosecutor. For example, in 2009 and 2010, the TSSB prosecuted individuals who were sentenced to 99 years in prison.
Furthermore, the TSSB almost always has jurisdiction. It is extremely rare that a securities offering will not touch Texas in some way and give the TSSB jurisdiction. For example, is there a Texas entity, an office in Texas, are there any Texas investors, any bank accounts in Texas, any meetings or advertisements in Texas, any telephone calls, faxes, emails, or mailings to or from Texas? Moreover, the defendant is almost always charged with a first-degree felony. If the amount involved is $100,000 or more, it is a first-degree felony. And the TSSB can aggregate the investors and the sales and the offers for sale. Because of this, it is extremely rare that the amount involved will ever be less than $100,000.
Some of you may be thinking, I know very little about securities fraud or the Texas Securities Act, but I remember something about federal exemptions and federal pre-emption. You are never exempt from the anti-fraud provisions of the Texas Securities Act and the anti-fraud provisions of the Texas Securities Act are never pre-empted by federal law.