YOU DON’T HAVE TO KNOW THE SECURITIES LAWS TO BE CRIMINALLY GUILTY OF A WILLFUL VIOLATION

Date: January 21st, 2010

Last November, the Supreme Court of Tennessee issued an interesting opinion in a securities fraud case called State of Tennessee v. Michael Casper. Mr. Casper had been convicted by a trial court of fifteen counts of willfully selling securities without registering as a broker-dealer with the State’s securities regulators. The trial court sentenced Casper to 60 years in prison and fines totaling more than $143,000.

Casper appealed, and Tennessee’s Court of Criminal Appeals reversed the conviction, finding that a willful violation of the State’s securities laws required that the defendant acted deliberately and was aware that the law prohibited such actions. In other words, if Casper didn’t know and understand Tennessee’s laws requiring broker-dealers to register with the State, then all he did was violate the law, rather than willfully violate the law. The distinction is critical because the former is a civil violation, while the latter is criminal. As the appellate court stated:

“…[the] distinction between criminal and non-criminal offenders means that the legislature intended only to criminalize the selling of securities by an unregistered broker-dealer when the person selling the securities is aware that his or her conduct is prohibited by Tennessee Code Annotated section 48-2-109, and yet nevertheless intentionally sells the security knowing he or she is violating the law.”

The State of Tennessee then appealed to its Supreme Court for consideration of whether Tennessee’s statute authorizing criminal prosecutions for violations of state securities laws requires proof that an unregistered seller of securities was aware that the sale is prohibited. The statute at issue states:

“Any person who willfully violates any provision of this part or who willfully violates any rule or order under this part commits a Class D felony. No person may be imprisoned for the violation of any rule or order if the person proves that the person had no actual knowledge of the rule or order.”

Fast-forwarding to the bottom line, the Supreme Court reversed the appellate court and reinstated Casper’s conviction. The Court ruled that actual knowledge of the securities knowledge is not necessary to be guilty of willfully violating them. All that is required is proof that the defendant acted deliberately and was aware of his or her conduct. Readers may focus on the second sentence of the statute and wonder how the Court could have reached such a conclusion and reinstated Casper’s prison sentence. The second sentence of the statute seems to suggest that jail time is not appropriate if the defendant did not actually know about the rule or order they violated. The Court tackled this issue by pointing out that the two sentences of the statute refer to different laws. The second sentence (the one requiring actual knowledge) refers to rules or orders issued by the Tennessee Securities Division, not to the state’s Securities Act itself, which is referred to in the first sentence of the statute as “any provision of this part.” In other words, to be guilty of willfully violating the Securities Act (and that’s what he was charged and convicted of), Casper didn’t need to know that what he was doing was illegal.

With this decision, Tennessee now joins the majority of states that do not require actual knowledge of the securities laws in order to be guilty of a criminal violation. Washington is among this majority. On the other hand, California and Alaska are examples of two states that require proof that the defendant had actual knowledge of the securities laws and that their conduct was in violation of such laws.

The Casper case also serves as a useful reminder in these days of heightened regulatory scrutiny of how easy it is for someone to be charged with a criminal violation of securities laws. One doesn’t have to be a securities lawyer or even have read the securities laws to be found guilty. All that is required is that the defendant acted intentionally, meaning simply being aware of what he or she is doing.

The majority view recently adopted by Tennessee has been the law in Washington for many years. RCW 21.20.400 provides:

“Any person who willfully violates any provision of this chapter except RCW 21.20.350, or who willfully violates any rule or order under this chapter, or who willfully violates RCW 21.20.350 knowing the statement made to be false or misleading in any respect, shall upon conviction be fined not more than five thousand dollars or imprisoned not more than ten years or both;…”

In the 1985 case State of Washington v. Markham, the Court of Appeals (Div. III) stated definitively that “knowledge of the securities laws is not an element of a criminal prosecution for their violation.”

In tough economic times, issuers, sponsors, brokers, dealers and anyone else involved in transactions with securities may be tempted to go it alone and save the expense of proper securities counsel. When it comes to a criminal prosecution under Washington’s securities laws, what you don’t know about the law is irrelevant – ignorance is not a defense and ignorance is not bliss.