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Civil and Criminal Liability for Selling Unregistered Securities in Maryland

I have represented both businesses and individuals before the Maryland Securities Commissioner on both civil and criminal charges stemming from selling unregistered securities. Most are under the impression that these enforcement actions by the Commissioner are civil in nature. Although this is most often the case, a criminal prosecution could result as well.

Selling unregistered securities or acting as an unregistered sales agent in Maryland is potentially punishable both with fines and imprisonment. Such penalties are contained in Title 11, the Maryland Securities Act, in the Corporations and Associations Article of the Maryland Code rather than the Criminal Law Article. Criminal penalties, however, are only likely to be imposed when a person willfully violates a provision of the Maryland Securities Act or an order of the Attorney General Securities Commission. MD. CODE., CORPS. & ASS’NS § 11-705. The statute specifically points out that “a person may not be imprisoned for the violation of any rule or order if the person proves that the person had no knowledge of the rule or order.” MD. CODE., CORPS. & ASS’NS § 11-705(a)(3).

While selling unregistered securities or acting as an unregistered sales agent are acts that could possibly be committed in conjunction with codified crimes such as embezzlement or larceny, there is not a specific statute in the Maryland Criminal Law Article that criminalizes selling unregistered securities or acting as an unregistered sales agent. Nevertheless, the Maryland legislature has enacted the Maryland Securities Act in Title 11 of the Corporations and Associations Article of the Maryland Code. The Division of Securities in the Office of the Attorney General is in charge of administering the Maryland Securities Act and can bring court action against violators of the Act. MD. CODE., CORPS. & ASS’NS § 11-201(a).

The Act states that a person violates the Maryland Securities Act if the person acts as a broker-dealer or agent and transacts business in the State of Maryland without being registered. MD. CODE., CORPS. & ASS’NS § 11-401. After giving notice and conducting a hearing, the Commissioner of the Division of Securities may fine any broker-dealer or agent up to a maximum amount of $5,000 for any single violation of the Maryland Securities Act. MD. CODE., CORPS. & ASS’NS § 11-417.

The Act further states that a person violates the Maryland Securities Act if the person offers for sale or sells any security in the State without registering the security under the Act, unless the security or transaction is exempted or the security is covered by federal statute. MD. CODE., CORPS. & ASS’NS § 11-501. The Act exempts from registration certain securities, including securities issued or guaranteed by the United States and any state or political subdivision of a state, securities issued by Canada, securities issued by and representing an interest in or debt of a bank organized under the laws of the United States, and other specifically listed types of securities. MD. CODE., CORPS. & ASS’NS § 11-601.

Violations of the Maryland Securities Act are punishable by fines. After notice and a hearing, the Commissioner of the Division of Securities may impose a fine against “any broker-dealer, agent, investment advisor, or investment advisor representative up to a maximum amount of $5,000 for any single violation” of the Maryland Securities Act. MD. CODE., CORPS. & ASS’NS § 11-417. In addition to imposing civil monetary penalties for any single violation of the Act, the Commissioner has the discretion to bring actions to obtain a temporary restraining order, a temporary or permanent injunction, a declaratory judgment, the appointment of a receiver or conservator for the defendant of the defendant’s assets, rescission, restitution, or any other relief the court deems appropriate. MD. CODE., CORPS. & ASS’NS § 11-702.

Finally, the Act states that any person who willfully violates any provision of the Act or any rule or order under the Act, or who willfully makes a knowingly false statement regarding a material matter may be subject to a fine not to exceed $50,000, imprisonment not to exceed three years, or both. MD. CODE., CORPS. & ASS’NS § 11-705(a)(1). If the alleged violator uses a senior or retiree credential or designation in any misleading manner in connection with the offer, sale, or purchase of securities, receiving any consideration for advising another person as to the value of securities or their purchase or sale, or acting as a broker-dealer, agent, investment advisor, or investment advisor representative, that violator may be subject to a fine not to exceed $100,000, imprisonment not to exceed five years, or both. MD. CODE., CORPS. & ASS’NS § 11-705(a)(2). Importantly, a violator of any rule or order issued under the Act may not be imprisoned if the person proves that he or she had no knowledge of the rule or order, emphasizing the requirement that the violation be willful for a person to face the prospect of imprisonment. MD. CODE., CORPS. & ASS’NS § 11-705(a)(3). Also, an indictment or information may not be returned under the Maryland Securities Act more than five years after the alleged violation. MD. CODE., CORPS. & ASS’NS § 11-705(a)(4).

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