Misrepresentations and Omissions

Misrepresentations and omissions relate to material facts that an investor should know or should have known. A broker-dealer must not give out materially false information, make misleading statements, or leave out facts that a reasonable investor would consider when making an investment decision.

A brokerage firm is required to disclose to a customer all material facts and material information. When the financial advisor or brokerage firm is not truthful and makes a false representation, an investor may have a claim if the investor relied upon the information to make a decision to purchase, sell, or hold a security or investment strategy.

Often, a misrepresentation is verbal and commonly occurs when discussing the risk level of the security or strategy, potential returns, or fees. For example, a broker-dealer may oversimply the risks of an investment or strategy without properly understanding the security or strategy that they are recommending. As a result, the broker-dealer may pitch the investment as safe, secure, and suitable for an investor with a conservative risk profile when, in reality, the investment is risky and speculative. We have seen numerous cases where a financial advisor recommends an investment or a strategy, but as it turns out, the financial advisor never fully understood the product. These types of situations often lead to the financial advisor making a material misrepresentation that can be detrimental to the investor.

A misrepresentation may also be written. Misleading statements may be found in offering prospectuses, marketing materials, presentations, portfolio recommendations, emails, or risk disclosures. A misleading statement in marketing materials may be an oversimplification of the risks associated with an investment or investment strategy through the use of generic language which fails to convey to investors the risk of loss – and the magnitude of the loss – which they may suffer. It may otherwise fail to accurately communicate the potential downside of the investment. If an investment has been concealed as safe and prudent in written materials, it is unlikely that an investor would have the necessary awareness of the real risks involved with the investment or investment strategy until it is too late. Further, these are often complex documents that require a degree of familiarity and sophistication. A misleading statement in any written material meant to deceive or mislead an investor is actionable.

Misrepresentations and omissions may also arise in the context of conflicts of interest if a broker-dealer is wearing “multiple hats” as both a broker-dealer and underwriter.

Similarly, a brokerage firm must provide all material information to an investor in connection with the purchase, sale, or recommendation to hold a security. The failure to provide all material information to a customer in connection with any of these transactions constitutes an omission. A brokerage firm or financial advisor may be held liable if material misrepresentations were made or material facts were omitted and, as a result, the investor lost money.

Under FINRA Rule 2010, broker-dealers must operate with the highest standards of commercial honor in their dealings with investors. If you believe you have been the victim of misrepresentations and omissions related to your investments or any other financial misconduct, contact the experienced securities arbitration lawyers at Iorio Altamirano LLP for a free case evaluation.