Board Member Liability for Securities Fraud

How Board Members Get Caught Up in Securities Fraud Investigations

Board Members Face Personal Criminal Liability for Securities Fraud—even if They Didn’t Directly Participate in the Fraudulent Scheme

Serving on a corporate board is supposed to be a prestigious and low-risk role. But when financial irregularities surface, board members quickly realize they could face personal criminal liability for securities fraud—even if they didn’t directly participate in the fraudulent scheme.

The myth that board service is insulated from criminal risk leaves many directors dangerously unprepared for SEC and DOJ investigations.

This is especially true when the fraud involved misrepresentations to investors or the market, as the Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) can hold board members criminally responsible for failing to prevent or detect this type of fraud. With SEC investigations typically running 18 to 24 months before a DOJ referral—and criminal charges following 6 to 12 months later—directors need to act quickly to protect themselves.

The Reality: Board Members Are Prime Targets

Federal prosecutors view board seats as evidence of control and culpability. The “control person” theory under Section 20(a) of the Securities Exchange Act allows the SEC and DOJ to hold directors personally liable for 100% of investor losses—even if they received no personal benefit from the fraud. The business judgment rule and D&O insurance do not protect against criminal prosecutions.

How Investigations Unfold:

• Financial irregularities are discovered, often through whistleblower reports.
• The SEC launches a 12-24 month investigation, subpoenaing documents and interviewing company leadership.
• If fraud is found, the SEC refers the case to the DOJ for criminal prosecution.
• Once charges are filed, the federal conviction rate for securities fraud exceeds 90%.
• Sentences are severe, with even “simple” fraud schemes resulting in multi-year federal prison terms and multi-million dollar restitution orders.

Recent Board Member Cases:

• Richard J. Randolph, III, Atlanta: Sentenced to prison for securities fraud as CEO. The amount involved was not specified.
• Jacob “Kobi” Alexander: Sentenced to 30 months in federal prison for securities fraud.
• Craig L. Berkman, Florida: Sentenced to six years in federal prison for a $13 million fraud scheme.
• Former CEO of Kubient, Inc. (Roberts): Pleaded guilty to an accounting fraud scheme involving $1.3 million.

How Board Members Become Liable

Board members don’t need to directly participate in the fraud to be held criminally liable. The DOJ uses control person theories to target directors who “should have known” about fraudulent schemes. This means that even if a director relied on management representations, they can still be held responsible for failing to exercise proper oversight.

Director Duties Under the Law:

• Duty of Care: Directors must act in good faith and with the care that an ordinarily prudent person would exercise.
• Duty of Loyalty: Directors must act in the best interests of the corporation and its shareholders.
• Duty of Good Faith: Directors must act with honesty and integrity.

When these duties are breached, directors can be held personally liable for the resulting damages. The SEC and DOJ will look at the totality of the circumstances to determine whether a director’s conduct was negligent or fraudulent.

The Personal Stakes

The consequences of a securities fraud conviction are severe. Directors face not only the loss of their board fees but also the potential for:

• Prison time: Multi-year federal sentences are common, with the 85% rule ensuring that directors serve at least 85% of their sentence with no early parole.
• Personal asset forfeiture: Bank accounts, real estate, and investments can be seized under criminal forfeiture, separate from civil restitution orders.
• Career destruction: A federal securities fraud conviction results in a permanent bar from serving as an officer or director of public companies, as well as exclusion from the financial services industry.
• Restitution: Multi-million dollar restitution orders are standard, based on total investor losses, not personal benefit received.
• Family impact: A federal conviction creates a permanent criminal record that can affect employment, professional licenses, and even children’s security clearance eligibility and college financial aid.

Key Competitor Insights

Skadden focuses on civil liability and procedural aspects, but misses the criminal prosecution risk and sentencing data. Harvard Law School Forum on Corporate Governance discusses how fraud can be used to put a company in play, but doesn’t address the criminal consequences for board members. Mintz covers control person status, but doesn’t address the federal sentencing guidelines or personal criminal exposure.

What Board Members Need to Do

If you’re a board member facing an SEC or DOJ investigation, you need to act quickly to protect yourself. This means:

• Retaining experienced legal counsel: You need an attorney who understands the complexities of securities fraud investigations and the potential criminal consequences.
• Conducting an internal investigation: You need to determine the extent of the fraud and who was involved.
• Cooperating with the authorities: You may need to provide information to the SEC and DOJ, but you should do so under the guidance of your attorney.
• Preparing for the worst: You need to be prepared for the possibility of criminal charges and the potential for prison time and personal asset forfeiture.

Conclusion

Serving on a corporate board is not a risk-free endeavor. When financial irregularities surface, board members can quickly find themselves facing personal criminal liability for securities fraud, even if they didn’t directly participate in the fraudulent scheme. The SEC and DOJ are aggressive in their prosecutions, and the consequences are severe. If you’re a board member facing an investigation, you need to act quickly to protect yourself.

Put our highly experienced team on your side

Contact Spodek Law Group today at 908-643-7005 to discuss your situation with our legal team. We are ready to help you protect your rights and your future.

Further Information About the Department of Justice

You can also find more information on this topic by following the links below.

• What is the U.S. Department of Justice?