Criminal Securities Fraud and the Lower Materiality Standard
Securities Regulation Law Journal, Vol. 41, p. 77, 2013.
21 Pages Posted: 21 Oct 2012 Last revised: 6 Mar 2013
Date Written: October 20, 2012
First, this essay argues that the materiality standard is lower under the relatively new criminal securities fraud provision, § 807 of the Sarbanes-Oxley Act, 18 U.S.C. § 1348, than under the traditional securities fraud provision, § 10(b) of the Securities and Exchange Act of 1934. In particular, in the context of alleged misrepresentations, § 1348 probably imposes a subjective materiality standard rather than an objective standard. In the context of insider trading, § 1348 probably imposes a source-oriented standard rather than an investor-oriented standard. Next, this essay considers the implications of this lower materiality standard in criminal securities fraud prosecutions under § 1348, including the chilling of legitimate market behavior, undue prosecutorial discretion, and disruption of the ordinary relationship between civil and criminal liability. Although these aforementioned concerns are also implicated by the mail and wire fraud statutes, this essay contends that § 1348 imposes a marginal impact. Finally, in light of these implications and this marginal impact, this essay offers guidance to market participants when engaging in behavior that might be within the broader scope of § 1348, to courts when interpreting § 1348, and to Congress when considering the appropriate incentives to encourage voluntary disclosure, securities analysis, and corporate transactions.
Keywords: White Collar Crime, Securities Fraud, Insider Trading, Materiality
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