Misrepresentation or omission of material facts are types of fraud that occur when a broker or other financial advisor does not fairly and fully disclose all of the known risks associated with a particular investment and losses are incurred as a result.
The offense is also present in cases where a broker has offered predictions or opinions, without a reasonable basis, about future stock performance or claims to have inside information about the issuing company. Both of these are common occurrences when stocks are promoted through boiler room operations.
Failure to disclose all associated fees, commissions or other charges is yet another example. In extreme cases, the fraud has included issuance of bogus account statements or recommendations of shares in companies the stock broker knows to be overvalued or worthless.
This type of violation occurs more during the offering process, where a company is selling its stock and is accused of making a misrepresentation on the offering documents. The claim also arises in regulatory actions and arbitrations, but is typically a less frequent event in the retail sales practice.
With misrepresentation, an investor alleges that the broker intentionally misled him or failed to disclose a material fact about an investment. While Courts require a showing that the broker acted intentionally or recklessly, arbitration panels often use the level of sophistication of the customer in deciding whether he was misled. Here, as with most securities claims, the credibility of the investor and the broker are crucial to the arbitration process. In addition, the documentation maintained by the parties is vital to obtaining a positive outcome.
If proven, an intentional misrepresentation claim can have serious consequences for the broker, as it is a violation of SEC Rule 10b-5, a matter taken very seriously by the regulators. A serious enough violation can even lead to criminal charges and prison time.
Our firm defends both broker and wronged investors. We believe that by representing both sides on these issues we have become more knowledgeable and better equipped to represent our clients. Whether you are an investor who believes your broker has misrepresented securities or you are a broker facing a complaint, contact us immediately.